Income Tax (INC) is the generic term used to describe the tax paid against your earnings.
All Income Tax is taxed at the same rate, regardless of what name is used to describe it. The below shows the different terms used to describe Income Tax:
PAYE - (for salary employees)
AKA: Salaried tax
- This is the term used for income tax paid for employees who earn a wage or salary (this applies to you if you get Annual Leave, Sick Leave and KiwiSaver contributions from your employer)
Provisional Tax - (for the self-employed)
AKA: Prov. Tax, PT
- Provisional Tax is not a separate tax but a way of paying your income tax in 3 equal instalments throughout the year rather than paying it as you go, or in one large sum at the end of the year.
- The amount you need to pay in Provisional Tax is based on your self-employed earnings from the previous year and the payments must be made by the due date or else you get penalties.
- You must make the payments regardless of what you are earning in the current year - not great if you had a bumper year last year but gaps in employment in the current year.
- The amount of provisional tax paid is then deducted from your final tax bill at the end of the year and it is only at this point that IRD will refund you if you have paid too much tax as your earnings were lower than expected.
Withholding Tax - (for the self-employed)
- This is the name given to Income Tax if you are working through a Recruiter or Third Party and they are paying you via Schedular Payments
- These entities are required to declare your earnings through them to IRD and a pay a nominal rate of Income Tax (withholding tax) against those earnings unless you have an exemption certificate from IRD.
- If you are being paid via Schedular Payments, the Recruiter or Third Party is legally required to get you to complete an IR330C form from IRD where you specify the rate of Withholding Tax to deduct and pay on your behalf (if they don't get this from you then they are actually required to deduct 45% WT so it's in your best interest to get one to them asap)
- As you are with Hnry, we recommend you select a rate of 10% for your Recruiter or Third Party to deduct and we will top up the difference (see Withholding Tax and IR330C Forms)
- Important Note: Withholding Tax deductions only contribute towards your Terminal Tax bill. You may still have tax owing at the end of year and these payments do not contribute towards any GST, Student Loan or ACC payment obligations
Resident Withholding Tax
- This is the form of Income Tax you pay on interest and dividends you earn from bank accounts and investments you have in New Zealand. Your payer (bank or fund manager), deducts RWT from your interest or dividend payment before they make any payments to you and declare this to IRD.
AKA: The one that makes you cry
- Terminal tax is the difference between the amount of tax paid during the year and the actual amount owed. If too little or too much was paid, as provisional tax, PAYE or Withholding Tax, terminal tax will square up the difference. IRD may apply 8.22 per cent interest to any underpayment of terminal tax
Regardless of what you call it, the tax you need to pay is based on your total earnings across ALL sources which is why it is imperative we know about any other income you have outside of Hnry (see How does Hnry calculate your Income Tax rate?)
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