UOMI payments just got cheaper. Here’s why…

By Joe Sothcott & Veronica Harley

The use-of-money interest (UOMI) rates have recently dropped. The new rates apply to over and under payments of tax with effect from 16 January 2025. In this article we explain why UOMI is charged by Inland Revenue, how the rates are set and consider if they might reduce further this year. We also take a look at tax pooling, an option that can help reduce UOMI risk.

What is UOMI?

UOMI is interest charged by Inland Revenue on underpaid tax or late payments. It is also payable by Inland Revenue when tax is overpaid by taxpayers. Despite being levied on a range of taxes; it is most often encountered when paying provisional tax and as a part of tax disputes and return reassessments.

Whilst UOMI may be levied in addition to penalties, it is not itself a penalty and therefore, UOMI paid is tax deductible, while UOMI received is income.

The underpayment rate is set above market rates to encourage taxpayers to pay their taxes on time and compensate the government for not receiving the payment when it was due. Meanwhile, the overpayment rate is deliberately set below market rates as it is intended to be compensation and not a return on investment. Inland Revenue does not want to be seen as an alternative to a bank.

What are the rates and how are they set?

Having seen three changes in 2023 to the UOMI rates, there was a hiatus in 2024 with no change. But with effect from 16 January 2025, the new rates are:

• Underpayment: 10.88%
• Overpayment: 4.30%

These are very marginal changes. The underpayment rate is down a miserly 3 basis points from 10.91%, and the overpayment rate is down 37 basis points from 4.67%.

Some may be wondering the point of this change. Since the last UOMI rates were set, inflation has eased, and there have been three cuts to the OCR of 125 basis points (5.5% to 4.25%). But it’s important to remember these rates are set by statue.

Here’s how it works:

The methodology for calculating rates is prescribed in a regulation. The underpayment rate is set as the Reserve Bank’s floating first mortgage rate for new customers in the housing market, plus 2.5%. The overpayment rate is either 0% or the Reserve Bank’s 90-day bill rate minus 1%, whichever is higher.

The rates must change when either:

1. The Reserve Bank’s 90-day bank bill rate or the floating first mortgage new customer housing rate moves by 1% or more from the figures used to calculate the last rate change; or
2. One of these indexes moves by 0.2% or more, and the UOMI rates have not been adjusted in the last 12 months.

The effective date of an adjustment to UOMI rates will typically be the day after the following standard method provisional tax payment date. The latest rates effective date of 16 January 2025 is the day following the second instalment of provisional tax due on 15 January for a standard balance date.

Given how the methodology works, another change in rates is on the horizon. The latest UOMI rates are based on data from August. Since then, the 90-day bank rate has dropped by more than 100 basis points. The floating first mortgage new customer housing rate has also dropped 99 basis points from 8.38% to 7.39%, meaning it is only one basis point away itself. Regardless, because the 90-day bank rate has changed by more than 1%, another change to the UOMI rates looks to have been triggered, which we expect to be from 8 May 2025.

Managing UOMI

Most taxpayers’ experience with UOMI will be when paying provisional tax. Having a general idea of how the provisional tax rules operate can help minimise unwanted UOMI exposure.

Most taxpayers use the “standard method” when calculating how much provisional tax they must pay. The standard method is generally based on the residual income tax from the previous year (or the year prior, depending whether the latest tax return has been filed), and generally payable in three instalments.

If the residual income tax is under $60,000 and the taxpayer uses the standard method, they qualify as a “safe harbour taxpayer”. A safe harbour taxpayer can pay all their residual income tax in a single instalment on their terminal tax date and is only liable to pay UOMI after this date has passed to the extent any tax is not paid by that date.

If residual income tax is more than $60,000 and the taxpayer uses the standard method, UOMI will apply from the day after the final provisional tax instalment is due if there is a difference between the actual residual income tax liability and the total amount paid by the final instalment date.

Because the final instalment of provisional tax occurs after the end of a taxpayer’s year (i.e. the 13th month), in theory, taxpayers should have more information about the results for this year and top up the final instalment amount if needed. But this is sometimes easier said than done, especially for those with fluctuating cash flow or complicated tax return adjustments.

Tax pooling

This is where tax pooling can help. We asked one of New Zealand’s leading tax pooling providers, Tax Traders to explain what tax pooling is and how it might help your business with cashflow.

As a key part of our income tax legislation for over two decades, tax pooling is integral to helping many New Zealand taxpayers manage their tax payments with less concern about high UOMI bills.

Where a taxpayer needs to change the timing of their provisional tax payment obligations to match their cash flow, tax pooling allows the taxpayer to defer upcoming tax payments to a time in the future that suits them. Rather than being exposed to UOMI and late payment penalties for adopting their preferred payment profile, taxpayers instead pay the lower interest rates offered by tax pooling providers.

Tax pooling can also reduce exposure to UOMI if a taxpayer’s finalised residual income tax is greater than initially forecast. The ability to top up any shortfalls/missed payments throughout the year helps reduce the uncertainty about ‘uplift’ payment obligations, particularly coming into the major provisional tax date on 7 May.

Under the tax pooling framework, taxpayers pay their taxes into a tax pool operated by a registered commercial provider, such as Tax Traders, instead of making payments to Inland Revenue. These payments are managed by an independent trustee, Public Trust, while they are held in the tax pool. A taxpayer who overpays their provisional tax has the option to sell this excess tax, which can be purchased by another taxpayer who has underpaid their provisional tax. A tax pool facilitates the transaction between the seller and the buyer at much favourable interest rates compared to UOMI rates.

Taxpayers who deposit their provisional tax into a tax pool also have the added flexibility of being able withdraw these payments should they need cash (as opposed to having these payments held at Inland Revenue until the tax return is filed). They also can use their tax deposits as collateral to secure affordable short-term working capital, subject to anti-money laundering checks.

Please contact your usual Deloitte advisor if you have any questions about UOMI or provisional tax, and Tax Traders if you would like to find out more about tax pooling.