The truth about taxes
It’s a common myth that we pay a third of our income in taxes. But not only does New Zealand have some of the lowest income tax rates in the OECD, we definitely don’t pay a third of our income in taxes!
So how much do we actually pay? Today, I’ll illustrate how income tax works and let you know how to check it out for yourself.
New Zealand has a progressive tax system. This means that everyone pays the same tax rate (10.5%) on the first $14,000 they earn, no matter what their total income is.
If they earn more than $14,000, they’ll pay 17.5% tax on the income that’s above the $14,000 threshold; if they earn more than $48,000, they’ll pay 30% on the income that’s above the $48,000 threshold, and so on.
The myth that we pay a third of our income in taxes comes from the tax rate for the highest tax bracket prior to 2021, which was 33%. This 33% rate only applied to income over $70,000, so if you were earning $75,000, only $5000 would be taxed at 33%.
Let’s say you earn the average NZ income - $53,598, based on the average gross household income of $107,196 in a two person household. Here’s how your tax would be calculated:
You’d pay $9099.40 on $53,598 of income, or 16.9% - less than a fifth.
What if you earned $70,000 a year?
You’d pay $14,020 on $70,000 of income, or 20% - exactly a fifth.
So how much would you need to earn to pay a third of your income in taxes?
Approximately $335,000:
You’d pay $110, 770 on $335,000 of income, or 33.1%.
According to the Trade Me Salary Guide, it’s highly unlikely that most typical New Zealanders would ever get to a point where they are paying a third of their income in taxes!
Check out the calculator for yourself using the IRD taxable income calculator here.
Don’t forget: taxes pay for financial support that you and your friends & family are likely to have received some time in your life, including:
The COVID-19 Wage Subsidy and COVID-19 Resurgence Support Payment
Our roads, schools, libraries, hospitals & healthcare
As I mentioned earlier, New Zealand has some of the lowest income tax rates in the OECD. In 2019, New Zealand ranked 24th out of 37 OECD countries in terms of tax to GDP ratio - far behind Denmark, France, and Belgium!
I don’t know about you, but this is why I don’t complain about paying taxes. It is a blessing to have easy access to many helpful resources, and to know there is support if you need it. Having lived in New Zealand for 25 years, I’d always had an excellent experience with government entities like IRD, WINZ, Studylink, and other public services. The government is also behind Sorted, a website I’ve found extremely useful for financial tips that are simple and easy to read. I’m grateful especially to our hospitals, who treated my family with immense care, kindness and compassion when my father passed away in 2019, and to our libraries, where you can not only get free books and movies to borrow, but free resources like internet, classes, and workshops.
I hope this post has helped you understand more on how income taxes work in New Zealand! Let me know your thoughts or questions in the comments below, or by using my contact form.
Love,
Sophia
