Determining and calculating marginal tax rates starts with knowing how much you or your employees earn each year. With this information, you can find the correct tax bracket and marginal tax rate to use.
In this guide, you'll learn about marginal tax, New Zealand's progressive tax system and how to determine the tax you or your employees will need to pay.
What is a marginal tax rate?
A marginal tax rate is used in a progressive tax system, like New Zealand's. The Inland Revenue (IR) uses multiple tax brackets to determine the amount of income tax individuals need to pay.
As your salary increases, your income might go over a tax threshold and into a new bracket. However, only the portion of income over the threshold is taxed at a higher rate. The rate that corresponds to the highest tax bracket is called your marginal tax rate.
Significance of marginal tax rates in accounting
Marginal tax rates are significant in accounting because you can use them to save on tax. For example, you should consider how much business income you expect to make when choosing your business structure.
If you operate as a sole trader, your marginal tax rates on your business income are the same as if you were employed. However, company tax rate is 28% in New Zealand. Therefore, you can end up paying more tax operating as a sole trader than if your business was structured as a company.
If you have employees, marginal tax rates can also affect how much you pay your team and how you manage payroll. Cloud payroll software can, however, easily manage these calculations and make life a lot easier for you.
How do marginal tax rates work?
Marginal tax rates work by taxing income over certain thresholds at higher rates. In New Zealand, each dollar of income is taxed at 10.5% from 0 to $14,000. The tax rate steadily increases with each tax bracket. The top rate is currently 39% for each dollar of income $180,001 and over.
Tax rates and brackets
New Zealand's PAYE tax brackets and marginal tax rates in the FY 2024-25 are:
$0 to $14,000 – 10.5%
$14,001 - $15,600 - 12.82%
$15,601 - $48,000 - 17.5%
$48,001 - $53,500 - 21.64%
$53,501 - $70,000 - 30%
$70,001 - $78,100 - 30.99%
$78,101 - $180,000 - 33%
$180,001 and over - 39%
How to calculate your marginal tax rate
Calculating how much tax you'll pay is more complicated than just finding your corresponding marginal tax rate. That's because as you move up tax brackets, not all your income will be taxed at the higher rate. You can use the IRD's Taxable Income Calculator to see your tax breakdown for your income.
Your tax to pay may also vary if you've claimed any deductions against your income or if you're paying secondary tax.
Marginal tax rate for under 18s
Marginal tax rates for under-18s in New Zealand match adult rates, except there is a tax-free threshold in some cases.
If a child is under 14 - or under 17 and still in school - they won't pay tax on income under $2,340, as long as they've earned the money doing odd jobs like babysitting or mowing lawns. This doesn't include any allowance from parents or gifts.
What is the difference between a marginal tax rate and an effective tax rate?
The difference between a marginal tax rate and an effective tax rate is that your effective tax rate is the percentage of your annual income you pay in tax. Your marginal tax rate is the rate attached to your last dollar earned.
Because New Zealand has a progressive tax system, your effective tax rate will be lower than your marginal rate. For example, if you earn $53,500 in FY 24–25, your marginal tax rate is 21.64%. However:
Your first $14,000.00 is taxed at just 10.50%, so you pay just $1,470.00 in tax.
For income over $14,000.00 and up to $15,600.00, you pay $205.12 in tax
For income over $15,600.00 and up to $48,000.00, you pay $5,670.00 in tax
For income over $48,000.00 and up to $53,500.00, you pay $1,190.20 in tax
Therefore, in total, you pay $8,535.32 in taxes. This is $1,470.00 + $205.12 + $5,670.00 + $1,190.20. As a percentage of your income, that’s 15.95% – your effective tax rate.
What is the marginal tax rate if I earn $100k per year?
The marginal tax rate if you earn $100k per year is 33% in New Zealand, although your effective tax rate will be lower.
What is the highest tax bracket?
The highest tax bracket in New Zealand is $180,001+, which is taxed at a marginal rate of 39%.
When do I need to start paying tax?
You need to start paying tax in New Zealand as soon as you begin earning money here. However, if you are under 18, your first $2,340 may be tax-free in some cases.
Make it marginally less taxing
New Zealand's PAYE system makes it simple for employees to keep up with their tax obligations. However, business owners need to know how marginal tax rates work, how they impact effective tax rates, and how they could help minimise business income tax.
MYOB helps you manage marginal rates and other tax complexities with ease. Award-winning accounting software and payroll systems help you keep track of employee earnings and automatically comply with changes to tax rates and regulations. Even better, MYOB does all your tax calculations for you, factoring in employee benefits, deductions and entitlements.
Sick of tax rate confusion? Get started with MYOB today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.
MYOB is not a registered entity pursuant to the Tax Administration Act 1994 and therefore cannot provide taxation advice to clients. If you have a query concerning taxation including filing your GST returns or annual tax statements, then you should consult with your accountant or other registered tax adviser.