What is Secondary Tax? Secondary tax is a tax system designed to ensure that individuals who have multiple sources of income are paying the correct amount of tax. It comes into play when an individual receives income from more than one employer or has additional sources of income outside of their primary employment. The purpose of secondary tax is to prevent individuals from underpaying their taxes due to the cumulative effect of multiple income streams.
Who Does Secondary Tax Apply To? In New Zealand, secondary tax applies to individuals who earn income from more than one employer concurrently or have additional sources of income outside their primary employment.
How Does Secondary Tax Work in New Zealand? When you have multiple sources of income, each employer deducts tax based on your earnings from that specific job. However, your total tax liability is calculated based on your combined income from all sources. This means that you may owe additional tax or become eligible for a tax refund at the end of the tax year, depending on your overall income and how much PAYE has been deducted during the year.
If you do not elect to us a secondary tax rate when receiving income from multiple sources, each employer will tax your income on the basis, they should utilise your lower marginal tax rates. This causes an issue at year end because your total tax liability is calculated based on your combined income from all sources. If your combined income from both sources pushes you into a new tax bracket, you will have underpaid your tax resulting in tax to pay.
An underpayment of tax can also occur when you change employment during the year, as the both employers will deduct PAYE on basis of utilising your lower marginal tax rate.
Tax Codes and Secondary Tax in New Zealand: To account for secondary tax, it is crucial to use the correct tax code when dealing with multiple income streams. Using the correct tax code ensures that the correct amount of tax is withheld by each employer, aligning with your overall tax obligations. In New Zealand, we have the following tax secondary tax codes:
Secondary tax is an integral part of the New Zealand tax system, ensuring fair and accurate taxation for individuals with multiple sources of income. By understanding how secondary tax works and staying proactive in managing your tax obligations, you can navigate the complexities of the New Zealand tax system confidently. Remember to seek personalised advice from a qualified tax professional or refer to the resources provided by the Inland Revenue Department for the most accurate and up-to-date information.
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be considered as professional tax advice. For personalised guidance and specific inquiries related to secondary tax or any tax-related matters, please consult with Sutcliffe Graham or refer to the official resources of the Inland Revenue Department in New Zealand.
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