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26 Nov 2015
This is a subject that confuses many wage workers. And very often, that makes it harder for employers to find and hang on to good part time workers. It is often said that it is not worth working a second, part time job, because the secondary tax on that income is so high. But the truth is that secondary tax costs a worker no more in the long run than ordinary income tax does.
The misnomer of secondary taxation comes from the method that the tax system uses to try and ensure that income, other than a person’s main source of income, is taxed at the right rate. The objective is to try and ensure that when all of a person’s incomes throughout a year are added up, and the tax which has been deducted is added up, the total tax deducted equals the right amount, as if all of the income were from just one source.
The tax system gives those with more than one source of income the ability to choose the rate at which secondary income is deducted by the employer. But if you don’t make the right choice, you can end up having either too much, or too little tax deducted. There’s an IRD form you use to do this. It’s an IR330, and you can get it from the IRD website, an accountant, or your employer.
The reasoning behind the selection of appropriate tax rates lies in our graduated tax rate system. This too, is often misunderstood. It is the same system that ensures that low income earners don’t pay much tax, and high earners pay heaps. There are 4 different tax rates:
• 10.5% for income under $14k pa (Code SB);
• 17.5% for income between $14 and $48k pa (Code S);
• 30% for income between $48k and $70k pa (Code SH)
• 33% for all income over $70k (Code ST)
The codes are easy to remember: SB for Bottom, S for Standard, SH for High, and ST for Top.
So it follows that if you have 2 sources of income, and the main one is say $40,000 pa, and a secondary source is say $5,000, the rate you should choose for the PAYE deduction from the second source should be 17.5% (code S). If you get it wrong and choose 10.5% (code SB) you’ll have tax to pay at the end of the year. But if you choose 30% (Code SH) you’ll get a tax refund at year end, IF you file a tax return.
If you have more than one income source, then filing a tax return is the sure way of establishing whether you’ve chosen the right codes during the year. Frequently people who have multiple sources of income will end up getting a tax refund once they have filed their returns. If your income is only from wages and interest, you don’t have to physically file a tax return, just contact IRD to request a personal tax summary (PTS).
Another group of people who should always file a tax return are those who have received contract payments which have been subject to Withholding Tax. This system also involves making an estimate of the rate at which tax is deducted. But more importantly, these earners are also able to claim expenses against the income. When we do tax returns for these earners, it is unusual for us not to be able to find a way of claiming a tax refund.
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