IRD late payment penalties: how they're charged, and how to stop them

Late payment penalties are IRD’s main incentive to pay on time, and its main reason your balance grows when you don’t. They’re set by law and explained on IRD’s website, but the details differ by tax type in ways that matter for which debt you clear first.

How do late payment penalties work for most taxes?

IRD describes three stages (IRD):

1. The day after the due date: a 1% penalty on the unpaid tax.
2. The seventh day after the due date: a further 4% penalty on the remaining tax, including penalties.
3. Every month after that: a 1% penalty each month the remaining tax and penalties stay unpaid, but not for GST, income tax (including provisional tax) or Working for Families overpayments.

So for GST and income tax, the late payment penalties are the initial 1% and 4%. The cost after that comes from use-of-money interest, which keeps running daily (see UOMI).

How are employer deductions different?

Much steeper. For PAYE and other employment deductions, IRD charges a penalty of 10% of the overdue amount, and another 10% is added each month the amount remains unpaid. When you pay the amount or enter an instalment arrangement, the last 10% penalty given reduces to 5% (IRD).

Tax type	Initial	Ongoing	Ways to reduce
GST	1% day after, 4% on day seven	No monthly penalty	Arrangement stops further penalties
Income tax, provisional tax	1% day after, 4% on day seven	No monthly penalty	Arrangement; tax pooling for timing
Some other taxes	1% day after, 4% on day seven	1% each further month	Arrangement
PAYE and employer deductions	10%	10% each further month	Paying or arranging cuts the last 10% to 5%

That’s why PAYE arrears should usually be cleared first.

Are there any exceptions?

• Small amounts. Penalties don’t apply to unpaid tax of $100 or less.
• First late payment in two years. IRD may give a grace period with a new due date. If you miss that date, the penalty is charged from the original due date.

How does an instalment arrangement affect penalties?

IRD’s penalties guide explains that if you keep to an agreed arrangement, no further late payment penalties are added from the date it was set up. If you set it up before the due date, only the first 1% applies; if it’s set up on or after the due date, penalties already charged stay (IR240). Interest continues either way.

If an arrangement is cancelled for default, IRD’s practice statement says monthly incremental penalties can be charged back as if the arrangement had never existed (SPS 18/04). See broken arrangements.

Penalties stacking up, especially on PAYE? Ask whether funding can clear it now. No credit check to enquire.

Can penalties be removed?

Sometimes, through remission, if an event beyond your control caused the late payment, you had a reasonable justification and you fixed it as soon as you could. Financial difficulty alone generally isn’t enough. See penalty remission.

What about late filing penalties?

They’re separate from late payment penalties. IRD’s guide lists late filing penalties for income tax returns of $50, $250 or $500 depending on income, and for GST returns of $50 (payments basis) or $250 (invoice or hybrid basis), with warnings first in some cases. Employment information has its own penalty after warnings. Filing on time, even if you can’t pay, avoids these and keeps the real balance visible.

What about shortfall penalties?

These apply when tax is underpaid because of how a return was prepared: 20% for not taking reasonable care or an unacceptable tax position, 40% for gross carelessness, 100% for an abusive tax position and 150% for evasion, with reductions possible for voluntary disclosure (IR240). If a review has found a shortfall, talk to your accountant about disclosure and your options.

An illustrative example

Illustrative only. Not a real client and not an offer.

A Wellington café group owes $30,000 of GST and $30,000 of PAYE, both two months overdue. The GST attracted 1% and 4% once. The PAYE attracted 10% in each of the two months. The owners use a cash-flow loan to clear the PAYE immediately, which cuts the latest PAYE penalty to 5%, and set up a short arrangement for the GST.

Which debt should you pay first when penalties differ?

When cash is limited, penalties are a good guide to priority, alongside legal deadlines. In broad terms:

1. Anything under a statutory demand or court deadline. The legal consequences outweigh penalty maths.
2. PAYE and employer deductions. Repeating 10% penalties and personal risk for directors.
3. New tax as it falls due. Avoid adding fresh 1% and 4% penalties on top of old debt.
4. Older GST and income tax. Penalties have already been charged, but interest continues daily.

Your accountant can refine this for your exact position, and our options checker gives a ranked plan based on what you owe and which letters you’ve had.

Stop the penalties at the source

If late payment penalties are building on your IRD balance, send us a quick enquiry. It doesn’t involve a credit check, we don’t share your enquiry with a pool of lenders, and a real person will call you back. Tell us which tax types are owing and for how long, as accurately as you can, so we can show you how much clearing them now could save.