Secondary tax shouldn't be a primary concern, by Stewart Russell
Secondary tax can be confusing for many wage workers. Often, people think it is not worth working a second job because secondary tax on that income is so high. The truth is secondary tax costs a worker no more than ordinary income tax does.
The misnomer of secondary taxation comes from a tax system that attempts to ensure income, other than a person’s main source of income (Code M), is taxed at the correct rate. The objective is to ensure that when all a person’s incomes and taxes paid throughout a year are added up, the total tax paid at least covers the liability and the taxpayer doesn’t get an unwelcome tax bill.
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 too much, or too little tax, deducted. IRD form IR330, available from the IRD website, accountants, or your employer, will help get it right.
The reasoning behind selection of appropriate tax rates lies in our graduated tax system. This is often misunderstood. It is the same system that ensures low income earners pay less tax, and high earners pay more. There are five tax rates:
- 5% for income under $14k pa (code SB)
- 5% for income between $14 and $48k pa (code S)
- 30% for income between $48k and $70k pa (code SH)
- 33% for all income between $70k and $180k (code ST)
- 39% for all income over $180 (code SA)
The codes are easy to remember: SB for Bottom, S for Standard, SH for High, and ST for Top and SA for Advanced.
So it follows that if you have two sources of income and the main one (Tax code M) is, say, $48,000 pa, and a secondary source is, say, $15,000, the rate you should choose for PAYE deduction from the second source should be 30% (code SH). However, if you choose 17.5% (code S) you will have tax to pay at the end of the year. And if you choose 33% (code ST) you will get a tax refund at year end.
If employees do have too much tax deducted, rest assured, the IRD automatically calulates the refund and credits your bank account at year end.
The situation is different for those whose income includes contract payments subject to Withholding Tax. They are still required to file a tax return and can claim expenses against the income. The default rate of withholding tax is determined by income type (e.g. director’s fee, agricultural contracts). These can be found on form IR330C. A contractor can choose a different rate as long it is not less than 10% for NZ tax residents or not less than 15% for non-residents. Your tax advisor can assist with this decision, so there are no unexpected year-end tax bills.