How does tax work?

In New Zealand, the main two types of tax are income tax (a tax on what you earn) and Goods and Services tax (a tax on what you buy - widely known as GST). All taxes are paid to Inland Revenue. There are other types of tax too - but here, we’re only going to focus on income tax.

Income tax is a percentage of what you earn that you pay to the Government. It’s often called Pay-As-You-Earn or PAYE. With Labour in Government, this money goes towards things like fixing hospitals, building schools, and making sure New Zealand has strong public services. 

Tax is one way we can keep Government debt under control. Before the COVID-19 pandemic hit,  Labour carefully managed debt, running surpluses and bringing net debt down to below 20%, as we promised we would. Even with the impact of COVID-19, New Zealand’s debt levels will remain lower than countries like the UK, US and Canada. Read more about how we’re keeping debt under control here.

How progressive tax works in New Zealand

How much tax you pay depends on how much income you earn. Our tax system is a progressive system - which is different than just paying the same flat rate on every dollar you earn. 

Currently, New Zealand’s progressive tax rates are:

Any income up to $14,000: 10.5%

Extra income over $14,000 and up to $48,000: 17.5%

Extra income over $48,000 and up to $70,000: 30%

Extra income over $70,000: 33%

A common misconception is that you pay all of your tax at the same rate - you just find what band your salary is, and then you pay that rate on all of your income. Under this system, someone earning $50,000 would pay 30% tax on every dollar they earned. But that’s not how tax works in New Zealand.

In New Zealand, we have a progressive tax system. This means everyone pays the lowest tax rate on the first $14,000 they earn (no matter what their total annual income is). 

If someone earns more than $14,000, they’ll pay 17.5% tax - but only on their income above the $14,000 threshold. If they earn more than $48,000, they’ll begin paying 30% tax, but again, this higher rate will only apply to their income above $48,000. It continues in this progressive way.

For example: If you earn $30,000, you pay 10.5% on each dollar earned up to $14,000, and 17.5% on the next $16,000. So in total, you pay $4,270 - not $5,250, which is what you’d pay if you had to pay the same 17.5% rate across all your income.

Another example: If you earn $65,000, you pay 10.5% on $14,000, 17.5% on the next $34,000, and 30% on the next $17,000.  So in total, you pay $12,520 - not $19,500, which is what you’d pay if you had to pay the same 30% rate across all your income.

One more example: If you earn $12,000, you pay 10.5% on that $12,000.  So in total, you pay $1,260. 

Labour’s tax policy

Labour has released its 2020 tax policy. For 98% of New Zealanders, there will be no income tax changes. 

To ensure we can fairly manage New Zealand’s recovery and rebuild from COVID-19, we will introduce a new top income tax rate of 39% that will apply to any income earned above $180,000. 

In these uncertain times, we need stability - including stability in our tax system. That’s why we’re committing now to no new taxes AND no further increases to income tax for at least the next three years. That includes no fuel tax increases.

Our balanced plan protects vital services like education and health and keeps a lid on debt.

There will be no income tax changes for 98% of New Zealanders. Only the top 2% - people who earn more than $180,000 - will contribute a bit more revenue to help support the recovery. 

The new top tax rate of 39% is still a lower rate than in other countries like Australia. Australians earning over this threshold pay a higher rate of 47% (including a 2% Medicare levy). We’re only increasing our top rate to 39%.

So, under Labour’s new tax policy, the progressive tax thresholds will look like this:

Any income up to $14,000: 10.5%

Extra income over $14,000 and up to $48,000: 17.5%

Extra income over $48,000 and up to $70,000: 30%

Extra income over $70,000 and up to $180,000: 33%

Extra income over $180,000: 39%.

With this system, 98% of Kiwis won’t see any income tax changes.

Check out this cool new tool to check if your income tax will be affected, and read more on Labour’s tax policy here.

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