Paye As You Earn (PAYE) Tax Guide


PAYE is an acronym in New Zealand for the Pay As You Earn withholding tax which is based on payments to employees usually in the form of salary. PAYE is almost always taken as the first cut before the income is received by the person and is based on a tiered system of tax rates. The payments are taken as the advanced payments of income tax.

In New Zealand all PAYE tax taken from the wages or salaries earned goes to the Inland Revenue Department (IRD) which is the public service department of New Zealand that collect all taxes.

For PAYE to be taken at the correct rates the tax payer must complete a tax code declaration form which at the current time is the IR330 form. This declaration is used to clarify the tax code that you will be taxed at. Things that influence the code that you will use are the following:

  • Whether you receive an income tested benefit. An example of this is receiving a state based support benefit such as an accommodation supplement.
  • Whether you have one or more sources of income
  • If you are a tax resident of New Zealand
  • If your income is within the window for the IETC (Independent Earner Tax Credit)
  • If you or your significant other is entitled to WFTC (Working for Families Tax Credits)
  • If you have a Student Loan

Without declaring the tax code on the completed IR330 the tax rate charged will be the no notification rate of 45%.

It is the employers responsibility to work out and deduct the correct PAYE, ACC Levy Fee, Student Loan and KiwiSaver amounts from an employee’s salary or wagers and to send the monies owed to the IRD.

EXAMPLE ONE:

Let’s look at an example of an employee who has a gross salary of $100,000.00 NZD per year. This salary was chosen as it is easier to see the relative percentages of the deductions for each facet of the calculation in the workings process.

  1. For the first $14,000.00 that a person earns in NZ the tax rate is 10.50% $14,000 * 10.50% (0.1050) = $1,470.00
  2. For the money earned between $14,000.00 and $48,000.00 the tax rate is 17.50% ($48,000.00 - $14,000.00) * 17.50% (0.1750) = $5,950.00
  3. For the money earned between $48,000.00 and $70,000.00 the tax rate is 30.00% ($70,000.00 - $48,000.00) * 30.00% (0.3000) = $6,600.00
  4. For the money earned from $70,000.00 onwards the tax rate is 33.00% ($100,000.00 - $70,000.00) * 33.00% (0.3300) = $9,900.00

Adding up (a) + (b) + (c) + (d) = $23,920.00 PAYE tax payable on the $100,000.00 gross salary.

Looking at the PAYE tax owing at the different tiers we can see that on this particular salary the breakdown is as follows:

  1. 1.47% of the gross salary goes to the first tier tax
  2. 5.95% of the gross salary goes to the second tier of tax
  3. 6.60% of the gross salary goes to the third tier of tax
  4. 9.90% of the gross salary goes to the top tier of tax

Given this example paid $23,920.00 in PAYE tax on a $100,000.00 the effective tax rate across the whole salary was 23.92%

EXAMPLE TWO:

Now let’s look at an example of an employee who has a gross salary of $55,000.00 NZD per year.

  1. For the first $14,000.00 that a person earns in NZ the tax rate is 10.50% $14,000 * 10.50% (0.1050) = $1,470.00
  2. For the money earned between $14,000.00 and $48,000.00 the tax rate is 17.50% ($48,000.00 - $14,000.00) * 17.50% (0.1750) = $5,950.00
  3. For the money earned between $48,000.00 and $70,000.00 the tax rate is 30.00% ($55,000.00 - $48,000.00) * 30.00% (0.3000) = $2,100.00

Adding up (a) + (b) + (c) = $9,520.00 PAYE tax payable on the $55,000.00 gross salary.

Looking at the PAYE tax owing at the different tiers we can see that on this particular salary the breakdown is as follows:

  1. 2.67% of the gross salary goes to the first tier tax
  2. 10.82% of the gross salary goes to the second tier of tax
  3. 3.82% of the gross salary goes to the third tier of tax

Given this example paid $9,520.00 in PAYE tax on a $55,000.00 gross salary the effective tax rate across the whole salary was 17.31%.