What Is Provisional Tax?
Provisional tax is a mechanism that allows SARS to collect income tax in advance from taxpayers whose income is not subject to PAYE (Pay As You Earn) withholding. Instead of paying all your tax at year-end, provisional taxpayers make two (or three) advance payments during the year.
Who Must Register as a Provisional Taxpayer?
You are a provisional taxpayer if you receive income other than a salary from which PAYE is deducted, AND that income exceeds R30,000 per year. This includes:
- Freelance or consulting income
- Business income (sole proprietor or partnership)
- Rental income from property
- Interest income exceeding R30,000
- Dividend income
- Director's fees not subject to PAYE
- Foreign employment income
The Three Provisional Tax Deadlines
| Payment | Period | Deadline |
|---|---|---|
| First provisional payment (IET1) | First 6 months of tax year (1 Mar – 31 Aug) | 31 August |
| Second provisional payment (IET2) | Full tax year (1 Mar – 28/29 Feb) | 28/29 February |
| Third provisional payment (optional) | Top-up after year-end | 30 September |
The third payment is optional but allows you to avoid the 20% underestimate penalty if your actual liability exceeds your IET2 estimate.
How to Calculate Your Provisional Tax Estimate
The calculation is based on your estimated taxable income for the full year:
- Estimate your total taxable income for the year
- Apply the applicable tax tables to calculate the gross tax
- Subtract applicable rebates (primary, secondary, tertiary)
- Subtract any PAYE already paid by an employer
- The result is your total provisional tax liability
For IET1, you pay 50% of this amount. For IET2, you pay the remaining 50% (or top up to the full amount).
The 20% Underestimate Penalty
This is the most dangerous aspect of provisional tax. If your IET2 estimate is less than the basic amount (the previous year's assessed taxable income), AND your actual taxable income exceeds R1 million, SARS will impose a 20% penalty on the difference between your estimate and the actual liability.
Example:- Actual taxable income: R1,500,000
- IET2 estimate: R900,000
- Actual tax liability: R405,000
- Tax on estimate: R243,000
- Shortfall: R162,000
- 20% penalty: R32,400
The penalty is in addition to interest on the late payment.
Safe Harbour Rules
To avoid the 20% penalty, your IET2 estimate must be at least:
- 90% of actual taxable income (for income above R1 million), OR
- The basic amount (previous year's assessed income)
Whichever is lower provides the safe harbour.
The Third Provisional Payment
If you realise after 28 February that your IET2 estimate was too low, you can make a voluntary top-up payment by 30 September. This payment does not eliminate the underestimate penalty if it has already been triggered, but it stops interest from accruing on the outstanding amount.
Practical Tips for Provisional Taxpayers
- Keep monthly management accounts — you cannot estimate your annual income accurately if you do not know your current position
- Set aside tax monthly — treat provisional tax as a monthly obligation, not a twice-yearly surprise
- Use the basic amount as a floor — if in doubt, estimate at least the previous year's assessed income
- Consider the third payment — if your income was higher than expected, the third payment can save significant interest costs
At Fulcrum | BI Prime, we prepare provisional tax estimates for all our clients, ensuring the estimate is accurate, defensible, and minimises penalty risk.
Sources: SARS Provisional Tax Guide | Fourth Schedule to the Income Tax Act
