How does income tax work in NZ?
Here’s a quick introduction to income tax in New Zealand.
Benjamin Franklin famously said: “In this world nothing can be said to be certain, except death and taxes.”
Yep, they’re not fun, but taxes are just part of having a job, and they’re something you need to know about.
Today, we’re going to look at how New Zealand’s tax system works for different types of employees. We’ll also explore how to work out what you should be paying in income tax, and therefore what will be left in your pocket.
Understanding New Zealand’s income tax system: some FAQs
1. Who pays tax?
If you’re earning money in New Zealand, you need to pay income tax. This goes for the self-employed, contractors and businesses as well as full and part-time employees.
2. What counts as taxable income?
Most income in NZ is taxable, this includes:
- Wages, salary or income from self-employment.
- Overseas income.
- Student allowances and benefits.
- Investments and assets such as rental income or Kiwisaver.
Some notable exceptions include gifts (if nothing is given in return), and inheritances and prize money (although if you invest these and then earn interest, this is taxable).
For this article, we’ll be focusing on tax relating to income from your employment.
You need to know what counts as taxable income.
3. How is my income taxed?
If you’re on a wage, or annual salary:
Full-time, part-time, casual or fixed-term contractors are all on what’s known as a pay as you earn (PAYE) system. Under PAYE, when you start a new job, you’ll hand over your IRD number and tax code to your employer, and they should ensure your tax is deducted in each pay cycle.
- But how do I know my tax code?
The IRD has a handy tool on its website that will help you work out your tax code. It’s important you get this right, so your employer can deduct the right amount in tax. If your tax code changes (for example, due to a promotion) you should let your manager know.
If you’re self employed
One of the ways self-employment differs from working for an organisation full-time is that you have to manage and pay your own taxes. This is because, in the eyes of the IRD, you’re a one-person business.
To pay your tax you’ll file an individual tax return (IR3 form) at the end of the tax year. In New Zealand, this is March 31st, and the IRD needs to receive your return by July 7 unless you have a tax agent or have agreed an extension of time.
When you come to file your return, your taxable income will be your full income minus any expenses you can claim – more on that below.
How to pay tax when you’re self-employed in NZ
Records, records, records. There, we’ve said it three times so it must be important – keeping good records is key to filing your tax return correctly. They help with:
- Keeping track of your income and expenses.
- Working out GST (if you’re registered for GST).
- Confirming your accounts.
- Ensuring you're paying the right tax for staff (if you’re an employer).
What tax records should I keep?
With all the following tax-related records, you need to hold onto them for seven years. They need to be in either English or Māori, unless the IRD has given you written permission to keep them in another language.
You should have:
- Records of income and expenses.
- Bank records.
- Record books – e.g. cash books, petty cash books, wage books and deposit books.
- PAYE records (if you employ staff).
- Credit and debit notes.
If you need more details on the tax records you need to have, and how you should store them, the IRD website has comprehensive info pages dedicated to this.
Keeping records is vital to making paying tax as simple as possible.
What expenses can I claim?
Business expenses may include, but aren’t limited to:
- Using part of your home for your business – for example, you might be able to claim a portion of expenses like power, insurance and your mortgage. It’s important to understand the IRD guidance for how to split this out.
- Vehicle expenses – if you have a vehicle that is only used for business, you can claim its full running costs, but if you also use it for personal reasons, you need to know how to split it out.
- Work – related mobile phones and the associated bills.
- Interest on money borrowed for your business.
- Depreciation on business equipment like computers.
- Work uniforms and stationary.
- Costs relating to membership of professional groups.
It’s really important that you fully understand what you can claim as an expense. The more you can legitimately claim, the less tax you’ll pay.
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