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25 May 2017
The vast majority of the working population are on wages and have PAYE deducted at source by their employers. They assume that their employer will deduct tax at the correct rate and therefore they do not owe any tax and haven’t paid too much.
However, the way the IRD tells employers to deduct tax assumes that the employee will earn exactly the same amount of money each pay period (whether that be weekly or fortnightly). Therefore if you earn an irregular amount of income each week, perhaps get a one off bonus, or just do not work for the full tax year, it is likely you have paid too much tax.
As it is budget day today, I am expecting the income tax bands to change slightly, but for the purpose of this example I will explain the system using the tax rates and bands for the March 2017 tax year. The first $14,000 of income per year is taxed at 10.5%, the next $34,000 at 17.5% the next $22,000 at 30% and anything thereafter at 33%.
For calculating your tax on a weekly basis the annual rates are simply divided by 52. The first $269.23 is taxed at 10.5%, the next $653.84 taxed at 17.5%, next $423.08 at 30% and anything over that is at 33%.
Let’s say John Smith is paid a salary of $39,000 or $750 per week. Each week the first $269.23 is taxed at 10.5% and the balance of $480.77 will be taxed at 17.5%.
At Christmas his employer is extremely generous and pays John a bonus of $9,000, on top of his usual $750 wages. John will probably be taxed on the first $269.23 at 10.5%, the next $653.84 at 17.5%, $423.08 at 30% and the balance of $8,403.85 at 33%.
However as John’s annual income is $48,000, the whole of the bonus should have only be taxed ay 17.5%. This means John has overpaid tax by $1,350.
It is possible that switched-on employers may tax bonuses separately as an extra emoluent at the correct rate of tax.
Of course the main question is how do I get my tax back. You could of course use an accountant to help, but if you only have PAYE income, you really don’t need us. You could use one of the various tax refund companies that seem to outdo themselves with how annoying their jingles or adverts can become. Both of these options cost you money.
But why should it cost you money when your employer has deducted more money from you than the IRD was entitled to. The simple answer is that it doesn’t need to cost you a dollar. Assuming you only have employment income, you can ring up IRD on a freephone number and request a Personal Tax Summary (PTS). This will show whether you have paid too much tax and if so, once you accept the personal tax summary, the IRD refund the money direct to you bank account for no charge. Just be careful, as a friend of mine discovered. She had previously used a tax refund company, she requested her tax refund, and the account number the IRD had noted for her was the tax refund company. The IRD refunded it to the bank account number it had. When the refund hadn’t arrived, we tracked down with the IRD’s help, where the money had gone. She then had to get the refund company to return the money back to the IRD and then get the IRD to refund the tax into her personal account.
It is possible that you may owe the IRD. This may occur where your have changed employers during the year, had multiple jobs at the same time. If you owe the IRD, they would send you a PTS anyway, so you are no worse off requesting one.
In today’s technological age you can of course request the Personal Tax Summary all on-line – just follow the link from the IRD website www.ird.govt.nz and once you have confimed your PTS, the refund should arrive in your bank account by June. But as noted above please make sure the IRD have your correct bank account number.
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