Those of you who receive annual provisional income tax assessments with an amount to be paid may have been surprised to learn that the Inland Revenue gives a discount if the total amount of the assessment is paid on time in one lump sum. Provisional assessments imposed in the year to which they relate may be paid in one lump sum or in instalments. Payment in instalments can be made by direct debit if desired. Only for assessments that may be paid in instalments, the Tax and Customs Administration grants a payment discount for lump-sum payments.
Unsurprisingly, the payment discount is basically a cigar out of your own pocket. Because you do not pay the amount of the assessment in instalments but immediately in full, the government enjoys an interest advantage that it passes on to you via the payment discount. After all, the government can dispose of the total amount of the assessment earlier. You yourself obviously enjoy an interest disadvantage because you receive less (savings) interest or other returns on the total amount of the assessment.
Due to the ‘exorbitant’ interest rates currently charged by the Inland Revenue, it may be interesting to opt for lump-sum payment of a provisional assessment, minus the payment discount. As you may know, for income tax, the Inland Revenue calculates an interest rate of 4% and for corporate tax even 8% (tax interest). However, an interest rate of 4% (recovery interest). This is significantly more than most people receive in interest on their savings accounts.
It will generally not be a huge advantage, but if the provisional assessment includes a substantial amount of tax to be paid, it may still be worthwhile. Of course, the size of the benefit depends on the actual return you realise on your (savings) income. If you wish, we can calculate for you whether making use of the payment discount is advantageous in your case and, if so, how big that advantage is.