Pay As You Earn (PAYE) is New Zealand's system for deducting income tax from salaries and wages. Under PAYE, your employer calculates and deducts tax from your pay before you receive it, then pays this directly to Inland Revenue (IRD) on your behalf.
PAYE was introduced in New Zealand in 1958, replacing a system where taxpayers paid their income tax in annual or quarterly lump sums. The change made tax collection more efficient and reduced the burden on individual taxpayers.
Today, PAYE is the primary method of tax collection in New Zealand, accounting for the majority of income tax revenue. Over 2 million New Zealanders have tax deducted through PAYE every pay period.
Every pay period, your employer follows this process:
As an employee, you must provide your employer with the correct tax code using an IR330 form. Your employer is then responsible for calculating and deducting the correct amounts. If they make an error, they're liable – not you.
Your tax code tells your employer how much tax to deduct. Choosing the right code is crucial to avoid over-paying or under-paying tax.
| Tax Code | When to Use | Features |
|---|---|---|
| M | Main job, no student loan | Most common code for primary employment |
| ME | Main job, IETC eligible | Income $24k-$48k, gets $520/year tax credit |
| MSL | Main job, with student loan | Deducts 12% above $22,828 threshold |
| M SL | Main job, student loan, IETC | Combines IETC credit and student loan deductions |
| Tax Code | When to Use | Tax Rate |
|---|---|---|
| SB | Second job, low income | 10.5% (for secondary income under threshold) |
| S | Second job (most common) | 45% flat rate |
| SH | Second job, with student loan | 45% plus 12% student loan = 57% total |
| ST | Second job, tailored rate | Custom rate set by IRD |
Using the wrong tax code can result in under-paying tax throughout the year, leading to a bill when you file your annual return. If you have two jobs, always use an M code for your main job and an S code for your second job.
Progressive tax based on your income level, ranging from 10.5% to 39%. This is the main component of PAYE and varies depending on how much you earn.
Currently 1.46% of gross earnings, the ACC Earners' Levy provides comprehensive injury cover for all New Zealanders, whether injuries occur at work or in your personal time. This rate is reviewed annually.
If you're enrolled in KiwiSaver, your contributions (3%, 4%, 6%, 8%, or 10% of gross pay) are deducted through PAYE. Your employer also contributes a minimum of 3%.
If you have a student loan, 12% of your income above $22,828 per year is automatically deducted. This only applies to income earned in New Zealand.
Gross pay is your total earnings before any deductions. Net pay (take-home pay) is what remains after PAYE, ACC, KiwiSaver, and student loan deductions. Your employment contract specifies gross pay, not net.
New Zealand uses a progressive tax system, meaning you pay different rates on different portions of your income. Understanding these brackets helps you calculate your actual tax liability and plan your finances effectively.
| Income Range | Tax Rate | Tax on Bracket | Cumulative Tax |
|---|---|---|---|
| $0 – $15,600 | 10.5% | $1,638 | $1,638 |
| $15,601 – $53,500 | 17.5% | $6,633 | $8,271 |
| $53,501 – $78,100 | 30% | $7,380 | $15,651 |
| $78,101 – $180,000 | 33% | Varies | Varies |
| $180,001+ | 39% | Varies | Varies |
Let's calculate the exact PAYE tax for someone earning $75,000 per year with tax code M (no student loan):
Your effective tax rate is the total PAYE tax divided by your gross income:
Notice that even though some income is taxed at 30%, the overall effective rate is only 19.6% because lower brackets are taxed at lower rates.
The IETC provides up to $520 per year ($10 per week) for eligible earners. This credit is built into your PAYE deductions, effectively reducing your tax.
| Annual Income | IETC Amount | Weekly Benefit |
|---|---|---|
| $24,000 - $44,000 | $520 | $10 |
| $44,001 - $48,000 | $520 - reducing | $10 - reducing |
| Above $48,000 | $0 | $0 |
Between $44,000 and $48,000, the IETC reduces by 13 cents for every dollar earned above $44,000. At $48,000, it reaches zero. This means earning slightly more could result in less take-home pay in this range.
If you have a student loan and earn above the threshold, repayments are automatically deducted through PAYE.
Always use tax code MSL (or M SL with IETC) if you have a student loan. If you use code M, student loan repayments won't be deducted, and you'll receive a large bill when you file your annual return.
The ACC Earners' Levy is currently 1.46% and covers:
The ACC levy is capped at a maximum earnings level (currently $139,384). If you earn above this, you don't pay ACC on the excess amount.
Your payslip is a detailed breakdown of your earnings and deductions for each pay period. Understanding every line helps you verify you're being paid correctly and track your finances effectively.
Your total earnings before any deductions. This includes:
If you're salaried, your gross pay should equal your annual salary divided by the number of pay periods (26 for fortnightly, 12 for monthly). For example, $60,000 salary = $2,308 fortnightly gross.
The largest deduction for most workers. This amount is:
Currently 1.46% of your gross earnings. This line should show:
If enrolled, this shows:
If you have tax code MSL or SH, this shows:
The final amount deposited to your bank account:
Most payslips show cumulative amounts for the tax year (1 April to 31 March):
Situation: Monthly salary, no student loan, no KiwiSaver
| Item | Amount |
|---|---|
| Gross Monthly Salary | $4,500 |
| PAYE | -$715 |
| ACC Levy (1.46%) | -$66 |
| Net Pay | $3,719 |
Situation: High income, 6% KiwiSaver, no student loan
| Item | Amount |
|---|---|
| Gross Monthly Salary | $12,500 |
| PAYE (33% bracket) | -$3,456 |
| ACC Levy (1.46%) | -$183 |
| KiwiSaver (6%) | -$750 |
| Net Pay | $8,111 |
Note: Employer also contributes $375/month (3%) to KiwiSaver
Situation: Primary job (M code) and secondary job (S code)
Primary Job Payslip:
| Item | Amount |
|---|---|
| Gross Fortnightly | $1,730 |
| PAYE (M code) | -$242 |
| ACC | -$25 |
| Net | $1,463 |
Secondary Job Payslip:
| Item | Amount |
|---|---|
| Gross Fortnightly | $577 |
| PAYE (S code - 45%) | -$260 |
| ACC | -$8 |
| Net | $309 |
At year-end, you may get a refund because secondary income is taxed at 45% flat rate, which could be higher than your actual marginal rate. File an annual return to claim any refund owed.
Common things to verify:
If you spot an error, contact your payroll team immediately. Common fixes include updating your tax code, correcting your KiwiSaver rate, or adjusting student loan deductions. Most errors can be corrected in the next pay period.
Your payslip should also show:
Let's explore how PAYE works in practice across different income levels and situations.
Situation: Emma just started her first full-time job as a customer service representative earning $50,000 per year. She's using tax code M (no student loan) and isn't enrolled in KiwiSaver yet.
Situation: Michael is a software developer earning $65,000. He has a student loan and is enrolled in KiwiSaver at 3%. Tax code: MSL.
Michael's student loan repayment of $5,061/year ($195 per fortnight) is significant. However, the loan is interest-free while he's in NZ, so every dollar goes directly to reducing the principal. If his loan balance is $30,000, he'll pay it off in about 6 years at this rate.
Situation: Sarah is a senior accountant earning $120,000 per year. She contributes 6% to KiwiSaver and has no student loan. Tax code: M.
Situation: James works full-time earning $45,000 (M code) and part-time on weekends earning $15,000 (S code - 45% tax rate).
If James were earning all $60,000 from one job with M code:
James has overpaid tax by $4,125 because his secondary job was taxed at 45% when his actual marginal rate is only 17.5%. He must file an IR3 annual return to claim this refund. IRD doesn't automatically refund multiple job scenarios.
Situation: Lisa works as a retail manager earning $42,000. She's using tax code ME to receive the Independent Earner Tax Credit. No student loan, no KiwiSaver.
Lisa is in the perfect income range for IETC. If she earns a pay rise to $48,001 or more, she loses the entire $520 credit. This creates a "tax cliff" where earning $1 more costs $520 in lost credits - effectively a 52,000% tax rate on that extra dollar!
Complete this 10-question quiz to assess your understanding of the PAYE system
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