Tax
For most people, this is the most uninteresting aspect of finance. Who can have an interesting conversation about tax? You receive your hard-earnt wages, then the taxman comes and takes his share.
To be clear, we aren’t tax advisors, and we aren’t going to tell you how to dodge or avoid taxes. This is about clearing up common misconceptions and ensuring you have a basic understanding of the biggest expense you face.
If you’ve ever been worried about moving into a higher tax bracket, or not wanted a second job because of secondary tax, read on.
Tax Brackets:
In New Zealand, like most countries, we have a Marginal Tax system. This means that as you move into a higher tax bracket, the marginal income you earn (i.e. Every dollar above the new threshold) is taxed at the new rate. You will NOT be taxed any more on the income you’ve earnt under the tax bracket.
For example, if you’re earning somewhere between $14,000 and $48,000 annually, every extra dollar you earn will be taxed at 17.5%. After $48,000 (up to $70,000) you move into the 30% tax bracket. This means every dollar over $48,000 is taxed at 30%, but the first $48,000 is still taxed the same way as before.
As an example, on $48,000 you will pay a total of $7,420 in tax. If you get a pay rise to $49,000 then you will pay a total of $7,720 in tax. An extra $300 in total from a $1,000 pay rise.
Therefore, you shouldn’t ever refuse a pay rise on the belief that it will put you in a higher tax bracket! *
*If you are receiving government supplements e.g. Working for Families then this can be impacted by increases in pay
Secondary Income Tax:
If you take on a second job, then income from this job is given the Secondary Income tax code. Previously this meant it was often charged at a higher rate than your normal income, and you would be due a refund at the end of the financial year.
Now IRD has made some changes, and they will actively check the amount of tax you pay to ensure you are paying the correct amount. They may suggest alternatives including getting a tailored tax code so that you won’t be over or under paying tax.
It’s important to note, that Secondary Income Tax does NOT mean you are penalised for having a second income. You are simply charged a different rate to ensure you will not have a tax bill at the end of the year.
As a basic example, if you worked 2 jobs both earning $20,000 annually, the total earnings you need to be taxed on are $40,000. If both incomes were taxed seperately as if they were your primary income then you would have paid a total of $5,040* in tax.
However the tax due on $40,000 of income is $6,020*. This means you would owe IRD nearly $1,000 at the end of the year!
*Excluding independent earner tax credit which may be applicable at this income level
Tax Refunds:
After the end of the financial year, you may be eligible for a tax refund. In 2019 IRD made major changes to the system, which simplified the tax refund process, and allowed for automatic tax refunds for many people.
Previously it was common for people to use tax agents who would handle it for them, but would take a cut or a fee from it. This wasn’t unusual because claiming a tax refund used to be a confusing process for most people.
Now there is very little reason to do this, as it will simply be giving away some of your tax refund for someone else to do what is now an extremely easy process.
See more information on the IRD website here