Have you ever wondered what the heck are these tax codes and how do they relate to the tax that you end up paying by the end of the year?
Well, wonder no more because today we’re going to clear up the air surrounding them!
Note that the information contained in this article is more relevant to employees than it is to employers. Someday I will write an article about PAYE and salary deductions (but that’s for a different day).
Ok, with that out of the way, let’s answer the first question:
What are tax codes?
Tax codes – simply put, are codes that your employer uses to determine the amount of tax they need to deduct from your wages before they pay you. Generally speaking, tax codes can be grouped into three broad categories.
Please note that you have to supply a different tax code for each source of employment you have and that you may not necessarily be using the same tax code for each source of employment.
As such tax codes ONLY apply if you are an employee on PAYE with an employer.
The first category are the ‘M’s – this code is used if this income source is your main (or largest) source of income:
M is for you if you are not earning (from ALL sources) between $24,000 and $48,000 a year.
ME is the same as M, except that it is for individuals that are earning (from ALL employment sources) between $24,000 and $48,000 a year. Basically tax deducted under this code allows for the $520 Independent Earner Tax Credit that you are eligible for. Don’t remember or know what IETC is? Check out this handy guide here.
The Second Category are the ‘S’s – this code is used if this income sources is your secondary (IE NOT your main source) of income:
If you are making less than $14,000 a year from ALL income sources, you are SB (no ‘W’ though – sorry, but if you actually ARE SBW, you wouldn’t be reading this anyway :p).
If you are making between $14,001 and $48,000 a year from ALL income sources, you are S.
If you are making between $48,001 and $70,000 a year from ALL income sources, you are SH.
If you are making MORE than $70,001 a year from ALL income sources, you are ST.
The last category of tax codes are special tax codes for:
- Casual Agricultural workers (CAE)
- Election day workers (EDW)
- Recognised seasonal workers (NSW)
- Tailored tax code (STC)
These codes are very specific and since this is a general article – we won’t be covering them in greater detail. If you want to find out more about them – check out the IRD website on tax codes here.
Wait, what about SL?
SL stands for ‘Student Loan’ – basically you slap an SL at the back of your tax code if you have a student loan from the NZ government – this tells your employer to make the necessary deductions from your salary to pay off your student loan as well.
Oh, ok – that’s cool, but more importantly, HOW MUCH AM I PAYING IN TAXES??
Yup yup, I’ll answer that question now.
Basically you employer will deduct a fixed percentage from your paycheck based on your expected annual earnings:
For both M and ME, you can expect the following amounts to be deducted from your paychecks based on how much your annual salary is:
|% of deduction||Expected total annual income|
|11.89%||$0 – $14,000|
|18.89%||$14,001 – $48,000|
|31.39%||$48,001 – $70,000|
|34.39%||$70,001 – $130,911|
Let’s say Gerry earns $65,000 as a marketing executive. He receives gross pay of $2,500 every fortnight. He has a tax code of ‘M’ with his employer, therefore he gets his gross pay deducted by about 20.65% or $516.25 before receiving his net pay. If Gerry has a student loan to pay, then he becomes ‘M SL’ and has an additional 12% (about $300) deducted from his gross pay.
Note that for all income ABOVE $130,911, you are taxed at 33%
For all codes in the S category you can expect to pay:
|Tax Code||% of deduction||Expected total annual income|
|SB||11.89%||$0 – $14,000|
|S||18.89%||$14,001 – $48,000|
|SH||31.39%||$48,001 – $70,000|
|ST||34.39%||$70,001 and above|
Welp, ok that was pretty much the same as ‘M’ but with the minor variation that all income earners above $70,0001 gets taxed at 34.39%.
Also note that the % amount given in the tables are rough amounts and the actual tax deducted will depend on the the frequency (and amount) of your paychecks – but it will be roughly around the % figures given in the tables.
If you have a student loan – an additional 12% deduction gets slapped onto your paycheck – and that’s that.
Given that these rates are progressive, keen observers will notice that the % tax deducted does work out to be higher than your effective tax rate (remember effective tax rate? We discussed it in the last article). This is because there is an additional 1.39% which represents ACC earner levies. Hence why income taxed above $130,911 is taxed at 33%, because the maximum liable for earner’s levy is $130,911.
That being said, it can be quite likely that you may get a refund from the IRD at the end of the year. Bearing this in mind, please DO NOT pay anyone to sort out your tax refund for you. IRD generally processes this for you. You can easily check whether or not you have a refund due by logging onto your MyIR account.
Ok, why is it important for me to determine what the right tax code is?
Simply because it affects the amount of tax that gets deducted from your salary. If say, for example the part-time job you are working in becomes full-time – you will want to change the tax code from SB to M. If you suddenly had a reduction in wages (due to COVID-19 for example) for your main job and your side hustle is suddenly making more money – you will want to change that M to an S. Every time there is a change in your employment situation, you will want to review your tax codes to ensure that you are paying the right amount of taxes.
Oh, wow, so I may be actually paying MORE taxes than I should? Why?
Err, not necessarily – taxes are calculated on a financial year, not a calendar year and your actual earnings at the end of the financial year (1 April to 31 March) may differ from the expected annual income on your contract. IRD does a square up of your annual income over the last financial year to work out your tax position.
Either way, the IRD would rather have you overpay them than underpay them – that way they ensure that you meet your tax obligations and don’t owe them money.
Plus this creates the additional psychological reward of getting a fat refund at the end of the tax year (even if the money was rightfully yours to begin with). Yay!
If you didn’t get anything else from this article – just remember two things:
- You may get a tax refund at the end of the financial year
- NEVER EVER PAY ANYONE TO DO YOUR TAX REFUNDS
Now the next time you feel like whinging about taxes, you have numbers to back you up!
But on a more serious note – at the very least this will help you roughly estimate how much taxes you are paying during the year and how much you may receive in the form of a refund (or how much you have to pay up!) :).