Understanding Marginal Tax Rates!

Nobody likes taxes, I figure thats why a lot of people don’t take the time to understand them.

When I was younger I thought the tax system was horribly unfair. Why would anyone want a pay rise if it meant getting taxed more! You might end up with less money in the hand after a pay rise!

Oh how wrong I was.

You see New Zealand has a marginal tax system, when your salary increases to fall in a higher tax bracket only the dollars over that income threshold are taxed at the higher rate.

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So if you get a pay rise from $48,000 to $49,000 only the $1000 over the $48,000 will be taxed at 30% rate NOT the whole $49,000. This way you retain the benefit of low taxes on a portion of your income.

Lets look at a breakdown of a real world salary, lets pick a completely random, no relation to this blogs author, made up, fictitious number out of the air……$66,740.

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Well that salary is not even large enough to get hit by the top tax bracket. How disappointing. (This person should really get off their ass and try hustle a pay rise). The table nicely breaks down the tax paid in each bracket, leaving a final cash in the hand annual salary of 53,698.

However there is one more tax to be paid in New Zealand, the ACC levy. The Accident Compensation Cooperation is a government run initiative that “provides comprehensive, no-fault personal injury cover for all New Zealand residents and visitors to New Zealand.” Yes you read that right, no fault and visitors covered. Its pretty amazing, most medical bills resulting from accidents are covered 100% and you can get income compensation payments if you can no longer work as a result of the accident. Like income tax it is deducted directly from wages.

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So even though the salary of 66,740 falls into the 30% tax bracket the effective rate is only 20.99%. The effective tax rate is much lower than the tax bracket your salary falls in.

If you want to see how your salary is taxed in New Zealand then the calculator at salaries.co.nz breaks everything down nicely, it even can account for student loan deductions and Kiwisaver.

One thought on “Understanding Marginal Tax Rates!”

  1. Personal income tax rates are so often misunderstood. So many times I’ve heard the less educated say things like “it’s not point doing overtime because you lose it all in tax”, or “there’s no point getting a second job because the tax rate is so high “.

    How many times have I tried explaining how a marginal rate works only to be told that I’m incorrect.

    In Australia, we do even better by having an $18,000 tax free threshold. So no tax on the first 18 grand you earn.

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