It's been 14 years since New Zealand updated its tax thresholds, and the 2024 Budget brings much-needed changes to address fiscal drag. With rising inflation and wage growth pushing many into higher tax brackets, the government aims to provide relief, especially for low and middle-income earners.
Summary
On 30 May 2024, the New Zealand Government unveiled the 2024 Budget, introducing personal income tax cuts targeted at low- and middle-income earners. These changes, now in effect as of 31 July 2024, have increased the tax thresholds, excluding the highest income band. The government anticipates an average tax reduction of NZ$30 per week for many New Zealanders. Additional tax relief is also provided through increased worker and family tax credits.
Breakdown of Changes:
These adjustments reflect the government's commitment to easing the tax burden on low to middle income New Zealanders. The start date was deferred from 1 July to 31 July to give employers and payroll providers more time to update their systems. However, the choice of 31 July, rather than 1 August, complicates our calculations. By shifting to this date, we now need to work with the formulas 121/365 and 244/365 (representing dates at the old and new thresholds respectively), instead of the more straightforward conceptual divisions of 1/3 and 2/3.
The 2024/25 tax year will be a "composite" year, meaning that tax obligations will be averaged across the year. This may result in some employees having a tax liability or credit based on their income distribution throughout the year. Factoring in the threshold adjustments and application dates, for the 2024/25 tax year, there will be eight tax bands that need to be applied to calculate the total tax obligation, here is a preview of how this will look for the tax year:
Threshold Calculations:
Consequential Changes
The recent tax threshold adjustments impact not only payroll and personal tax calculations but also other tax types. Here's a detailed breakdown of the changes and their implications:
Extra Pays and Tax Codes
The government has decided to maintain the current approach for extra pays and tax codes for the 2024/25 tax year. Threshold changes for these will take effect from 1 April 2025, avoiding immediate disruption.
Secondary tax codes
“If you use a secondary tax code, you should check if your yearly PAYE income payments will be in the new threshold. When the new rates apply from 31 July, you may need to change your tax code by completing an IR330 form.” Read more about this on the IRD website here.
Fringe Benefit Tax (FBT)
"From 31 July 2024 where benefits are attributed to each employee, a change applies to how FBT is calculated. A new calculation field will be added between tax on remuneration and FBT payable — 'FBT on net income'. To get the tax, this new field takes the net income figure and applies the FBT rates table to it — in the same way that the tax on remuneration field is calculated.
The change only applies to final quarter calculations — 4 January to 31 March, or any quarter that an employer ceases providing fringe benefits" Read more about this on the IRD website here.
Employer Superannuation Contribution Tax (ESCT)
ESCT rates, based on the previous year’s income with a 20% buffer, will change from 1 April 2025 to simplify compliance and reduce costs. Read more here.
The following thresholds will apply:
ETC threshold amount | Tax rate |
$0 - $18,720 | 10.5% |
$18,721 - $64,200 | 17.5% |
$64,201 - $93,720 | 30% |
$93,721 - $216,000 | 33% |
$216,001 + | 39% |
Retirement Superannuation Contribution Tax (RSCT)
Employers opting to pay RSCT will apply new thresholds aligning with personal tax thresholds from 1 April 2025.
Prescribed Investor Rates (PIR)
Adjustments to PIR for KiwiSaver and other Portfolio Investment Entities will take effect from 1 April 2025, aligning with new personal tax thresholds. The top PIR remains at 28%.
Resident Withholding Tax (RWT)
Taxpayers moving to a lower tax threshold can opt for a lower RWT rate by notifying their interest payer. Read about RWT here.
Independent Earner Tax Credit (IETC)
Effective 31 July 2024, the upper threshold for IETC eligibility extends to $70,000, benefiting an additional 420,000 taxpayers. Apportionment calculations will ensure accurate credit allocation for the partial year.
FamilyBoost
Starting 1 July 2024, FamilyBoost allows parents to claim back up to 25% of early childcare costs, capped at $75 per week. This applies to households with incomes below $180,000. Employers may need to answer questions from employees regarding this relief, though it is administered by Inland Revenue. Read more here.
In-Work Tax Credit (IWTC) and Minimum Family Tax Credit (MFTC)
The IWTC increases from $3,770 to $5,070 per year, while the MFTC threshold rises from $35,204 to $35,316 per year after tax, effective from 31 July 2024.
Recommendations for Employers
Employers should take proactive steps to familiarise themselves with the new requirements. Communication with payroll providers is crucial to understand the timelines for software updates and testing. For those managing payroll in-house, it might be a good time to consider outsourcing to avoid compliance issues.
Conclusion
The 2024 Budget’s tax threshold changes are designed to offer substantial relief to New Zealanders, particularly those on lower and middle incomes. Employers must take proactive steps to implement these changes efficiently. Staying informed and prepared will ensure a smooth transition and maximise the benefits of the new tax rates.
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