Hnry is designed to ensure that you can always be up-to-date on your taxes, and that you never get a big tax bill at the end of the year. The system will fluctuate your tax rates up and down throughout the year, based on how much you earn, as well as how much your business expenses are - so that you know you're always on top of your tax.
For this system to work correctly, it needs the right information from you, particularly about any earnings you've had prior to starting with Hnry.
When you start with Hnry, as part of the sign-up process, it is really important to provide us with information about how much income you earned prior to joining Hnry (across ALL sources) and how much income you are expecting to earn for the remainder of the financial year (a financial year runs from 1 April to 31 March each year).
The tax rates for Income Tax, set by IRD, are shown below.
N.B. As an Independent Earner you may be subject to contribute Withholding Tax (WT) payments deductions by your Client. Withholding Tax is just another name for Income Tax - they are one and the same, so the tax rates are identical.
How are income tax rates applied by IRD?
Across all your earnings, you are required to pay tax based on what is known as a "Blended or Marginal Tax Rate" (or Average Tax Rate) where you get one rate applied to the total all of your earnings. This means that the bandings of tax rates in the table above are 'blended' across all your total earnings - rather than having to apply different tax rates at different points in the year.
You earn $50,000 in a year across all income sources.
Your Blended Tax Rate would be 16.04% and is applied to ALL earnings to keep your tax payments consistent throughout the year, rather than fluctuating as you move through the different tax bandings.
How does this work if I have income from prior to using Hnry?
If you currently have, or have had a permanent job or other income since April 1st prior to joining Hnry, then this has an affect on what your overall blended tax rate in Hnry needs to be, to make sure you don't end up with a big tax bill at the end of the year.
A previous (or current) employer will only be taxing you at a Blended Rate based on the amount you are earning through them, as they will have no visibility of any of your other sources of income.
This is why we need to know about all your sources of Income in Hnry, so we can account for the fact that if you have both permanent and self-employed income, your permanent employer is most likely not taking enough tax from you. (see Why we need to know about your other sources of income).
How your Tax Rate is applied in Hnry?:
- We use the prior and ongoing income information you provide us when you sign-up to set your starting Blended Tax rate in Hnry.
- As you continue to earn through Hnry, the system tracks how much you are getting paid and the frequency of your payments to identify how you are tracking against the initial income forecast (across all sources) that you provided to us at sign-up.
- If it looks as though you are on track to earn more than your initial forecast then the system will start to inflate your income tax rate gradually to ensure you are not left with a tax bill at the end of the year.
- Conversely, if it looks as though you are going to earn less than initially thought then the system will reduce your tax rate so you are not overpaying tax.
- If you do not enter in all information regarding your other income outside of Hnry at sign-up, the Blended Tax Rate applied to your income through Hnry is likely to be incorrect.
- If you update your Financial Details to declare additional earnings outside of Hnry after you have already been using Hnry for some time, then the system will re-calibrate to take these changes into account.
- If we are a long way into a Financial Year before receiving your accurate Financial Details, there will most likely not be enough time for the system to re-calibrate your tax rate and recoup any shortfall in tax owing on previous earnings - so there may be a bill to pay IRD at the end of the year.
- This is why it is imperative to keep your Financial Details in Hnry up to date right from day one, to ensure that you don't get large spikes in your Blended Tax rate
If you have any questions at all about whether we have all the information we need to get you (and keep you) on the right tax rate then please feel free to contact the team.