(NZ Secondary tax codes – 3 minute read)
There is a lot of misconception about secondary tax codes in Aotearoa. Secondary tax only applies to the secondary source of PAYE salaried income.We have covered secondary tax in our guide to NZ tax codes. This article will focus on busting some myths and misconceptions about secondary tax codes:
Secondary Tax Code Myth #1: You pay more tax on secondary sources of income
No you don’t.
You still pay the same amount of tax at the end of the financial year. At the end of the year, IRD will calculate your total income and tax you based on your individual tax brackets. Secondary income sources (like a part – time job) will increase your total income. Any increase in total income increases the amount of tax you have to pay. An increase in secondary income is no different from an increase in your primary income. You still end up paying the same amount of tax at the end of the year.
It feels like you are paying more tax because PAYE deductions made on your secondary sources of income are done at a slightly higher rate than your primary source of income. This means that the amount of tax put aside after receiving your secondary income is proportionally higher than your primary income. You will get a refund for excess deductions at the end of the financial year.
It does mean that you will be a bit short of cash from your secondary income (compared to your primary income) until the financial year ends.
Secondary tax code Myth #2: Self Employment triggers the secondary tax code.
Generally speaking – it shouldn’t.
Tax for self employment income calculates at the end of the financial year. In your first year of business, you will pay this amount in a lump sum. In subsequent years, you may have to pay provisional tax. You can do this via the standard method or the Accounting Income Method. Do read this article to learn more about them.
If you have a primary PAYE salaried job, starting self employment will not put you on the secondary tax code. You don’t have to change any tax codes. Remember that secondary tax codes only apply to PAYE sources of income, not self employment.
However, if your self employment income becomes your primary source of income AND you still are working at your PAYE salaried job, this changes your income situation. You now have to switch to the secondary tax code for your PAYE job since your self employment is your main source of income.
Secondary tax code Myth #3: Secondary tax codes apply to all sources of secondary income.
As mentioned above, this isn’t the case as self employment income don’t make use of tax codes. However, here are some examples of income that are taxed at source but don’t use secondary tax codes:
Contractor on schedular deductions
If you are a contractor, you may be receiving payments from your clients/employers with tax deducted. Please note that these are not PAYE deductions, but they are known as Withholding Tax (WT) on schedular deductions.
Casual agricultural and seasonal worker
If you do seasonal work on a day to day basis, you don’t apply for a secondary tax code. Casual agricultural workers use the CAE tax code and other seasonal workers use the NSW tax code.
Election day workers
If you are helping with election day as a worker, your tax deductions are made using the special EDW tax code. Secondary tax codes don’t apply here, even if your election day work is your secondary income source.
Secondary tax codes keep you on top of taxes
The main reason why secondary tax codes are higher than primary tax codes is because:
- Secondary sources of income can put you in a higher tax bracket.
- Your primary employer is making deductions for you based on the assumption that you aren’t working a secondary job.
So if an opportunity to do extra work on the side appears, don’t turn it down on the basis of having to pay secondary tax!