Does the underestimation penalty apply to the first provisional payment?

No. Paragraph 20 measures your second estimate, the one due at the end of February. Your first estimate is not tested for underestimation in this way.

If my estimate reached my basic amount but not 90%, am I safe?

For actual taxable income of R1,000,000 or less, yes. You only need to clear one of the two tests, so reaching the basic amount covers you even when you fall short of 90% of actual. Above R1,000,000 the basic amount does not help, and you must reach 80% of actual.

Is the penalty 20% of my income?

No. It is 20% of a shortfall: the tax on 90% (or 80%) of your actual taxable income, less the tax you already paid for the year. In the example above, a R200,000 gap between estimate and actual produced a penalty of R8,952, well short of 20% of any income figure.

Can SARS reduce or cancel the penalty?

Yes. Paragraph 20(2) lets SARS remit the penalty where you calculated your estimate seriously and did not understate it deliberately or through negligence. You would need to show how you arrived at the figure.

Is this the same as being charged interest for late payment?

No. The underestimation penalty is separate from the paragraph 27 late-payment penalty and from section 89bis interest. They arise from different failures and can apply on their own.

The provisional tax underestimation penalty, explained

Paragraph 20 of the Fourth Schedule charges a penalty of 20% on the amount your second provisional estimate fell short by. Only your second estimate, the one due at the end of February, faces this test. The first payment is never measured for underestimation. If that second estimate came close enough to your actual taxable income for the year, or at least reached your basic amount, nothing is charged.

When the penalty is triggered

Which test you face depends on what you actually earned for the year.

If your actual taxable income for the year is R1,000,000 or less, a penalty applies only when your second estimate was both:

less than 90% of your actual taxable income, and
less than your basic amount.

Clearing either test is enough. Reach 90% of what you actually earned, or reach your basic amount, and you owe no penalty.

If your actual taxable income comes to more than R1,000,000, the basic amount stops protecting you. From there a penalty applies whenever your second estimate came in below 80% of your actual taxable income.

How the penalty is calculated

The 20% is charged on a shortfall, not on your income, and that shortfall is a gap between two tax figures.

Where your actual taxable income is R1,000,000 or less, the shortfall is the normal tax (after rebates) on 90% of your actual taxable income, less the total tax you already paid for the year through PAYE and provisional tax.

Above R1,000,000, swap 90% for 80%: normal tax on 80% of your actual taxable income, less total tax paid. Either way, you take 20% of the result.

What the basic amount means

Your basic amount is the taxable income that was last assessed for your most recent preceding year of assessment. Strip out any taxable capital gain that was included in that year. If the assessment being used is for a year that ended more than one year before the current estimate is due, you increase the basic amount by 8% a year. This figure only matters for the R1,000,000-or-less test, where reaching it is one of the two ways out.

A worked example

Take a freelancer whose actual taxable income for the year turns out to be R600,000, which puts her in the R1,000,000-or-less rule. Her basic amount, being last year's assessed taxable income, was R520,000. On her second IRP6 she estimated R400,000.

Start with the two tests. 90% of her actual taxable income is R540,000, and her R400,000 estimate sits below that, so it fails the 90% test. It also sits below her R520,000 basic amount. Both tests fail, so the penalty applies.

Next, work out the normal tax on 90% of actual, which is R540,000. That falls in the R512,801 to R673,000 bracket:

R121,475 + 36% x (540,000 - 512,800)
= R121,475 + 36% x 27,200
= R121,475 + R9,792
= R131,267

Subtract the primary rebate of R17,235: R131,267 - R17,235 = R114,032.

Now work out the tax she actually paid. She had no PAYE, and her provisional payment rested on her R400,000 estimate. That falls in the R370,501 to R512,800 bracket:

R77,362 + 31% x (400,000 - 370,500)
= R77,362 + 31% x 29,500
= R77,362 + R9,145
= R86,507

Subtract the primary rebate of R17,235: R86,507 - R17,235 = R69,272.

The penalty is 20% of the difference:

20% x (R114,032 - R69,272)
= 20% x R44,760
= R8,952

Getting the penalty remitted

Paragraph 20(2) lets SARS remit the penalty if it is satisfied that you calculated your estimate seriously, with regard to the factors you could reasonably foresee, and did not understate it deliberately or through negligence. Keep your workings and the assumptions behind the estimate; they are what you lean on if you have to ask for remission.

This is not the paragraph 27 penalty for paying provisional tax late, nor the section 89bis interest. A low estimate can trigger the paragraph 20 penalty even where every payment landed on time.

Where to go next

To see how the two provisional payments fit together across the year, read how to calculate provisional tax in South Africa. If you are unsure whether these rules even reach you, check who counts as a provisional taxpayer. For the wider picture on declaring freelance earnings, see the freelancer and side income tax guide. You can also estimate your normal tax for the year with the basic income tax calculator.

SARS sources: