At Super-Advice we are about all things financial, but more importantly, helping people understand so they can get ahead financially.
If you’re a full-time employee in New Zealand, understanding how the tax system works is essential for managing your finances effectively. While taxes might seem complicated, New Zealand’s tax system is relatively straightforward compared to other countries. Let’s break down how it works, explore ways to legally minimize your tax liability, and provide some thoughts on the fairness of the system compared to similar nations.
How Tax Works in New Zealand
Income Tax is the primary tax that affects full-time employees. Here’s a basic breakdown:
Pay As You Earn (PAYE)
If you’re a full-time employee, your employer deducts income tax directly from your salary or wages through the PAYE system. The amount deducted depends on your income level and tax code.
Tax Rates
New Zealand uses a progressive tax rate system, meaning the more you earn, the higher the percentage of tax you pay on your income.
ACC Levy
In addition to income tax, there’s also an Accident Compensation Corporation (ACC) Levy, which is a small percentage of your income to cover the cost of New Zealand’s no-fault accident insurance scheme. This is also deducted by your employer.
Tax Codes
Your tax code helps your employer calculate the correct amount of PAYE. It’s important to ensure you’re on the right tax code, as being on the wrong one could mean you’re paying too much or too little tax.
Ways to Minimize Your Tax Legally
While paying tax is unavoidable, there are legal ways to minimize your tax liability. Here are some strategies:
KiwiSaver Contributions
Contributing to KiwiSaver, New Zealand’s voluntary savings retirement scheme, not only helps you save for retirement but also provides tax benefits. Contributions are taken out before tax, and the government matches your contributions up to a certain amount annually.
Claiming Work-Related Expenses
If you incur expenses directly related to your job that aren’t reimbursed by your employer, you may be able to claim these as tax deductions. For example, if you use your own vehicle for work purposes, you may be able to claim a portion of your vehicle’s expenses.
Donations
Donations to approved charities can be claimed as a tax credit, reducing the amount of tax you need to pay. You can claim a 33.3% tax credit for donations over five dollars.
Investment Income
If you have investments, consider investing in a Portfolio Investment Entity (PIE) fund such as certain managed funds. PIEs have different tax rules and can be more tax-efficient compared to other investments.
Check Your Tax Code
Ensure you’re on the correct tax code. If you’re working more than one job, you’ll need to use a secondary tax code for the additional income. Checking your tax code regularly can help avoid overpayment, as the government doesn’t automatically refund excess tax.
Rental Property Losses
If you own rental property and it incurs a loss, you may be able to offset that loss against your other income, reducing your overall tax bill.
The Fairness of the New Zealand Tax System
The New Zealand tax system is designed to be straightforward and equitable, with a progressive income tax structure that ensures higher earners contribute more. While there are legal ways to minimize your tax liability, it’s important to remember that taxes fund vital public services like healthcare, education, and infrastructure.
Overall, the New Zealand tax system is fair compared to similar countries, particularly in its simplicity and the absence of some of the taxes that other nations impose. However, like any system, it has its complexities and areas that could be improved to ensure greater fairness.
That’s a wrap
Understanding how the tax system works and taking advantage of available tax benefits can help you make the most of your earnings while fulfilling your tax obligations.
If you need any financial help or advice please get in touch with us at Super-Advice.
