Provisional tax is one of the most misunderstood tax obligations in South Africa. Many small business owners pay it late, underpay it, or do not pay it at all. This guide explains everything you need to know in plain language, without the jargon.

What is provisional tax?

Provisional tax is not a separate tax. It is a method of paying your income tax in advance, in two instalments during the year, rather than as one large lump sum at the end. The South African Revenue Service uses this system to collect income tax from people who do not have an employer deducting PAYE from a salary.

If you run your own business, work as a freelancer, earn rental income, or have any income that does not have PAYE deducted, you are almost certainly a provisional taxpayer.

Who must pay provisional tax?

You are a provisional taxpayer if you:

Companies and close corporations are also provisional taxpayers and must file provisional tax returns.

When are the deadlines?

There are two mandatory provisional tax payments per year, and an optional third:

First provisional tax return (IRP6) and payment: Due within six months of the start of your financial year. For individuals whose tax year ends 28 February, this means the first provisional tax payment is due at the end of August.

Second provisional tax return and payment: Due at the end of your financial year (28 February for individuals, or the last day of your company's financial year).

Third (optional) top-up payment: Due seven months after the end of the financial year (30 September for individuals). This allows you to top up your payment if your estimate was too low, avoiding a penalty.

How do you calculate what you owe?

You must estimate your taxable income for the full year and calculate the tax on that amount. Then subtract any employees' tax (PAYE) already deducted and divide the remaining tax by two to get each provisional payment.

The estimate must be at least 90% accurate. If you underpay by more than 10% of the actual tax owed, SARS can charge you a 20% penalty on the shortfall. For individuals earning more than R1 million, the penalty applies if you underpay by more than 80% of the actual tax owed.

What if you miss a deadline?

SARS will charge interest at the prescribed rate on the outstanding amount from the due date until the date of payment. They can also issue an estimated assessment and collect through debt collection processes. Interest currently accrues at a rate set quarterly by SARS based on the repo rate.

Practical tips for staying compliant

Keep accurate monthly income and expense records. If you know your income and expenses month by month, your provisional tax estimate is straightforward. If your records are a mess, you are guessing, and guessing high enough to avoid penalties can tie up cash unnecessarily.

Set aside tax from every payment you receive. A common rule of thumb is to set aside 25 to 30 percent of every payment into a separate savings account as you earn it. This prevents the shock of a large tax bill and ensures you always have the money available when it is due.

Track your SARS deadlines on a compliance calendar. Missing a provisional tax deadline is entirely avoidable. The dates are fixed and known in advance. A reminder 30 days and 7 days before each deadline means you never miss them.

Work with a registered tax practitioner. For most small businesses, the cost of a good accountant or tax practitioner is significantly less than a SARS penalty. They also often find deductions you would have missed, which reduces your actual tax liability.