Our office often receives calls from employees and their employers concerned about the effect of secondary tax when they are getting a second job. People are generally unhappy about the idea of having to a higher rate of tax just because they have got themselves a new source of income to help pay the bills.
The good news is that it is a common misconception that people pay a higher rate of tax when they get a secondary tax code. New Zealand’s tax and PAYE system is designed so that employees are taxed at the correct rate. We have a progressive tax system so that individuals pay a higher rate of tax as they earn more. Our current tax rates for individuals are as follows:
$0 - $14,000 – 10.5%
$14,001 - $48,000 – 17.5%
$48,001 - $70,000 – 30%
$70,001 + – 33%
All new employees starting a job must fill out a tax code declaration form (IR330). The employee is responsible for choosing a tax code and there is a flow chart that IRD have produced to determine which tax code an employee should be on. If a person’s annual income from all sources is likely to be less than $14,000 then the secondary tax code (for their second job) is SB. If income is likely to be between $14,000 and $48,000 the tax code is S. If the income is to be between $48,000 and $70,000 a SH tax code is used and if income from all sources are going to be above $70,000 then an ST income tax code is used. Income from an SB tax code is taxed at 10.5%, for an S code the rate is 17.5%, for an SH code the tax is at 30% and for ST 33%.
So in practise the income from a person’s second job should be taxed at the correct rate.
In reality the system works and calculates the tax correctly about 90% of the time. The 10% of the time when the secondary tax system doesn’t work is when someone’s income crosses one of the income thresholds ($14,000, $48,000 or $70,000) due to the income from their second job. An example of this is where someone’s first job earns them $40,000 per annum which they would have an M tax code for. Their second job earns them $10,000 per annum which they would have an SH tax code for. The SH tax code taxes them on their $10,000 earnings at 30% where as in reality their first $8,000 of income from their second job should only be taxed at 17.5%. During the year this person will have PAYE deducted from their wages totalling $9,020 when in actual fact tax on $50,000 should come to $8,020. So they will be overtaxed by $1,000. Until the Inland Revenue Department update their computer system the only way to get around this is for people to file a tax return or request a Personal tax Summary from the IRD, or to apply for a special tax rate with the Inland Revenue Department.
The whole issue of payroll including tax codes, deductions including student loan, KiwiSaver and child support is a minefield and is extremely time consuming for small businesses to administer. Other tax codes such as CAE (Casual Agricultural Workers), WT (Schedular Payments) and the credit for independent earners earning between $24,000 and $48,000 (tax code ME) all have their own rules. While payroll programs do speed up the process we have found that sometimes even the computer gets it wrong, particularly when a bonus or other large wage payment goes over one of the income thresholds. The Inland Revenue Department have a very good PAYE calculator on their website which can be useful for these situations.
Care should always be taken with employees to ensure that they are paying the right amount of tax, student loan, KiwiSaver and other deductions. If in doubt, go to the IRD website or talk to a payroll specialist.