Changes to personal income tax and family tax credit in Budget 2008
Budget 2008, delivered on 22 May, announced changes to personal income tax and the family tax credit which have now been passed into law.
These changes take effect from 1 October 2008.
- Personal income tax rates
- Salary or wage earner
- Secondary tax payer
- Special tax code
- NZ Superannuitant
- Other individuals
- Provisional tax payer
- Employer
- Tax on interest and investment income
- Paying too little or too much tax
- Working for Families
- Annual rates
Personal income tax rates
The low income rebate has been removed from the 2008/09 tax year and a new bottom tax rate of 12.5% on income up to $14,000 introduced. Income thresholds for the 21%, 33% and 39% rates also increase over the next three and a half years, as set out below.
| Current rates | New rates from 1 October 2008 | ||
| Income to $9,500 | 15%* | Income to $14,000 | 12.5% |
| $9,501 - $38,000 | 21%* | $14,001 - $40,000 | 21% |
| $38,001 - $60,000 | 33% | $40,001 - $70,000 | 33% |
| $60,001 and over | 39% | $70,001 and over | 39% |
*Includes the low income rebate. The statutory rate on income under $38,000 is 19.5%. The low income rebate gave an effective rate of 15% for income under $9,500 and 21% for income between $9,501 and $38,000.
| From 1 April 2010 | From 1 April 2011 | ||
| Income to $17,500 | 12.5% | Income to $20,000 | 12.5% |
| $17,501 - $40,000 | 21% | $20,001 - $42,500 | 21% |
| $40,001 - $75,000 | 33% | $42,501 - $80,000 | 33% |
| $75,001 and over | 39% | $80,001 and over | 39% |
The introduction of new income tax rates part-way through the income year means an average of the new and old rates needs to be applied. This annual rate represents the actual amount of income tax that applies in the 2008/09 income year.
Salary or wage earner
You won't have to do anything. Your employer will use the new PAYE rates to calculate how much PAYE to deduct from your salary or wages starting from the first pay period that ends on or after 1 October 2008.
The Government has published a table giving estimates of the reduction in tax deducted weekly for different income levels.
Estimates of reduced tax
The table below gives an estimate of the reduction in tax deducted on a weekly basis from 1 October 2008.
| If your annual taxable income is... | then the estimated reduction in tax deducted weekly is... |
| $20,000 | $11.92 |
| $25,000 | $11.92 |
| $30,000 | $11.92 |
| $35,000 | $11.92 |
| $40,000 | $16.54 |
| $45,000 | $16.54 |
| $50,000 | $16.54 |
| $55,000 | $16.54 |
| $60,000 | $16.54 |
| $65,000 | $22.31 |
| $70,000 | $28.08 |
| $75,000 | $28.08 |
| $80,000 and over | $28.08 |
Secondary tax payer
While the Government has reduced the bottom tax rate, a matching secondary tax rate has not been introduced. Because of the new thresholds people on secondary codes may want to check they are still correct from 1 October 2008.
Secondary tax thresholds
Employees can elect a new secondary tax code if they believe that their annual income will be below the new threshold.
From 1 October 2008 to 31 March 2010 the secondary tax thresholds will be:
| Income range | Tax code | Tax rate |
| 0 - $40,000 | S | 21% |
| $40,001 - $70,000 | SH | 33% |
| $70,001 upwards | ST | 39% |
Special tax code
If you have a special tax code it may need to be recalculated before 1 October 2008. We'll provide more information in due course.
NZ Superannuitant
Work and Income will use the new PAYE rates to calculate how much tax to deduct from your NZ Superannuation payments starting from the first payment you receive after 1 October 2008.
Other individuals
The new rates will apply to school children who are working and to employees who make PAYE payments direct to Inland Revenue.
The personal income tax changes will not affect KiwiSaver, student loans or beneficiary payments.
Provisional tax payer
Your existing calculations apply until 30 September 2008. We'll provide more information about your options shortly. However if you:
- use the standard option, a new formula will apply to instalments due after 1 October 2008
- estimate you can decide to apply the new annual rate for the 2008/09 income year
- use the ratio method we'll recalculate the ratio for you and advise you accordingly.
Provisional tax payer standard method
If you pay your provisional tax by the standard method, the formula to calculate your provisional tax liability will change from 1 October 2008. You will need to reduce your residual income tax (RIT) by $730 before applying the standard uplift. Therefore the new formula will be:
(2007-08 RIT - $730) x 105% or 110% if you are using 2006-07 RIT.
This new provisional tax liability is then used when working out provisional tax instalments due after 1 October 2008.
You may want to discuss your options with your tax agent or accountant.
Employer
We'll issue new PAYE tables and update the PAYE calculator in early September. We'll also work with payroll developers so they can update payroll software. There will be more information in the June 2008 edition of Payroll News. The following questions and answers may also be helpful.
Employer questions and answers
What do I have to do?
We'll issue new PAYE tables and update our PAYE calculator in early September 2008. We're also issuing a new payroll specification to developers in early June 2008 so they can update their payroll software.
The new PAYE rates come into effect from 1 October 2008. This means you need to start using them to calculate the correct amount of PAYE to deduct from employees' salary and wages for pay periods ending on or after 1 October 2008.
What impact do the new rates have on fringe benefit tax?
The multi-rate fringe benefit rates for 2008/09 have changed.
For the 2008/09 year the following composite rates will apply:
| Income range | Tax rate |
| $0 - $8,194 | 0.1594 |
| $8,195 - $11,940 | 0.2012 |
| $11,941 - $30,900 | 0.2658 |
| $30,901 - $32,360 | 0.3699 |
| $32,361 - $45,760 | 0.4925 |
| $45,761 - $52,160 | 0.5625 |
| $52,161 upwards | 0.6393 |
You still have the option of paying fringe benefit tax of 64% on all fringe benefits rather than applying the multi-rates.
I have an employee who has a secondary tax code - what do I need to do in this case?
You do not have to do anything. No new matching secondary tax code is being introduced.
However, because of the change to income thresholds you may want to check if your employee is still using the correct code after 1 October 2008.
Employees can elect a new secondary tax code if they believe that their annual income will be below the new threshold.
The secondary tax thresholds from 1 October 2008 to 31 March 2010 are:
| Income range | Tax code | Tax rate |
| $0 - $40,000 | S | 21% |
| $40,001 - $70,000 | SH | 33% |
| $70,001 upwards | ST | 39% |
I have an employee who has a special tax code / deduction rate - what do I need to do in this case?
Don't do anything differently in unless the employee gives you a new certificate from us.
How do I handle extra pays?
Lump sum payments made to employees are known as extra pays. Tax on extra pays is currently withheld at 21%, 33% and 39%. These rates will not be changing. However employers and PAYE intermediaries will need to use the new thresholds to calculate the annualised pay of employees who receive extra pays. This applies from the first pay period that ends on or after 1 October 2008.
Thresholds from 1 October 2008 to 31 March 2010 are:
| Income range | Tax rate |
| $0 - $40,000 | 21% |
| $40,001 - $70,000 | 33% |
| $70,001 upwards | 39% |
How do the new rates affect the employer superannuation contribution tax (ESCT) that I calculate?
From 1 October 2008 the rates and thresholds for employer superannuation contribution tax (ESCT) will change. You will need to use the new rates and threshold amounts to determine how much tax to withhold on employer superannuation contributions. These will apply from the first pay period that ends on or after 1 October 2008.
From 1 October 2008 to 31 March 2010 the rates and thresholds for employer superannuation contribution tax are:
| Income range | Tax rate |
| $0 - $16,800 | 0.125 |
| $16,801 - $48,000 | 0.210 |
| $48,001 upwards | 0.330 |
Tax on interest and investment income
Even though banks and financial institutions will be withholding RWT from interest income at the correct rates, you may find you have paid too much income tax at the end of the income year, especially if you earn $14,000 or less.
If you think you may have paid too little or too much tax you can use the personal tax calculator or request a personal tax summary from us at the end of the income year.
The Government has not proposed changing tax rates and thresholds for PIES. This means the current tax rates and thresholds would continue to apply.
The Government has asked officials to review the RWT and PIE rates, engage with the financial services sector on the impacts of the income tax proposals and report back to them in due course.
Paying too little or too much tax
Although pay-as-you-earn tax (PAYE) is withheld by your employer and paid over to us throughout the year, your final end of year tax obligation is based on the income you have earned on an annual basis, ie, the total of your income at the end of the tax year (31 March 2009). Usually the PAYE system is accurate at withholding the correct amount of tax.
However when tax rates are changed part way through a year (as is happening this year) a person can end up paying too much or too little income tax. This is because we apply an average of the new and old rates across the entire year's income to determine a person's annual tax liability.
At the end of the tax year (after 31 March 2009) you can use our personal tax calculator to determine whether you have paid too much or too little tax. If this happens you can contact us and request a personal tax summary. Our calculator and the personal tax summary work out the correct amount of tax due based on all your taxable income.
Working for Families tax credits
From 1 October 2008 the family tax credit rates and income abatement threshold will increase to take account of inflation.
If you receive you Working for Families tax credits weekly or fortnightly, you'll automatically receive the new rates from your first payment after 1 October 2008. The table below shows the existing weekly family tax credit rates and the new rates that apply from 1 October 2008.
| Age / number of children | Current 1 April 2008 | New rate 1 October 2008 |
| First child if under 16 | $82.00 | $86.29 |
| First child if 16 or over | $95.00 | $99.96 |
| Subsequent child rate if under 13 | $57.00 | $59.98 |
| Subsequent child rate if 13 to 15 | $65.00 | $68.40 |
| Subsequent child rate if 16 or over | $85.00 | $89.44 |
If you receive your Working for Families tax credits in a lump sum after the end of the tax year, we'll use an average of the old and new rates to work out your correct entitlement. The table below shows the existing annual family tax credit annual rates and the new annual rates that apply for the 2008/09 income year.
| Age / number of children | Current 1 April 2008 | New rate for 2008 / 09 |
| First child if under 16 | $4,264 | $4,376 |
| First child if 16 or over | $4,940 | $5,069 |
| Subsequent child rate if under 13 | $2,964 | $3,042 |
| Subsequent child rate if 13 to 15 | $3,380 | $3,469 |
| Subsequent child rate if 16 or over | $4,420 | $4,536 |
The income abatement threshold increases from $35,000 to $36,827 from 1 October 2008. Because the threshold change is mid-year, an annual threshold of $35,914 will apply for the 2008/09 income year.
You can use our Working for Families calculator to get an estimate of what your entitlement will be from 1 October 2008.
Annual rates
The annual tax rate schedule for the year from 1 April 2008 to 31 March 2009 is:
| Income range | Annual tax rate applied |
| $0 - $9,500 | 13.75% |
| $9,501 - $14,000 | 16.75% |
| $14,001 - $38,000 | 21% |
| $38,001 - $40,000 | 27% |
| $40,001 - $60,000 | 33% |
| $60,001 - $70,000 | 36% |
| $70,001 and higher | 39% |
Date published: 19 Jun 2008
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