There are currently four individual income tax rates in New Zealand: 10.5 percent, 17.5 percent, 30 percent and 33 percent. At the 2020 election, Labour promised to introduce a new top tax rate of 39 percent on income over $180,000, likely to take effect from April 1, 2021.
As tax is often misunderstood, Newshub asked NZ tax and financial services leader John Cuthbertson how tax is calculated, and how the top tax rate would affect take-home pay.
Introducing a new tax rate requires legislation. The Government would likely enact the change in the Tax Bill, currently going through the parliamentary process.
"Introducing this new top marginal tax rate from the 2021-22 income year makes sense in terms of timing. As it's been signalled in Labour's election policy announcements, it should not come as a surprise to impacted taxpayers and would provide a sense of impetus that the Government is progressing on their policies," Cuthbertson said.
New Zealand tax system
New Zealand has a 'pay as you earn' tax system. For most people earning a salary or wage, this means income is taxed before they get paid.
The rate of the highest band of income a person receives is referred to as their 'marginal tax rate'. There's a common misconception that one tax rate applies to total earnings. Under New Zealand's progressive tax system, this is not the case.
"A 'progressive tax system' means that lower level of income are taxed at lower rates than higher levels of income," Cuthbertson said.
New Zealand individual tax rates (current)
- 10.5 percent is applied on income earned between 0 and $14,000.
- 17.5 percent on income earned between $14,001 and $48,000.
- 30 percent on income earned between $48,001 and $70,000.
- 33 percent on income over $70,000.
Working example: $50,000 per year
Cafe Manager Bob earns $50,000 per year (gross). Here's how his tax is calculated:
- First $14,000: taxed at 10.5 percent.
- $14,0001 to $48,000: taxed at 17.5 percent.
- $48,001 to $50,000: taxed at 30 percent ('marginal tax rate').
Under New Zealand's progressive tax system, Bob will pay $8,020 in tax, leaving him with a take-home pay of $41,980.
Working example: $200,000 per year with new top tax rate:
CEO Sam earns $200,000 per year (gross). Based on current individual tax rates (see above) Sam would pay $56,920 in tax, leaving him with a take home pay of $143,080.
With the introduction of the 39 percent top tax rate, Sam would pay $58,120 in tax ($1200 more) than under the current tax rates.
How tax is assessed by Inland Revenue
For those who earn income from employment, investment (bank deposit or savings interest), or a benefit under an employee share scheme, as of 2019, Inland Revenue automatically assesses income. If information is incomplete, they will request more information.
The assessment may result in a refund, or tax to pay.
"If a refund is due, this is now paid automatically to the bank account Inland Revenue holds for the taxpayer. It's the taxpayer's responsibility to check that the assessment is correct," Cuthbertson said.
Those who have income from other sources, such as rental property income, aren't automatically assessed.
"Instead they need to complete their individual tax return (IR3)."
Similarly, self-employed income isn't taxed before a person receives it.
"They need to put some of that income aside to pay it later this is called 'withholding'," Cuthbertson added.