The money you earn and the money you receive in your bank account are rarely the same amount. Understanding this gap—between gross pay and net pay—is fundamental to financial planning in New Zealand. When someone offers you a job, they quote a salary figure. But that's not what lands in your account each payday. Between earning income and receiving it, various deductions occur: income tax through PAYE, ACC levies for injury cover, KiwiSaver contributions building your retirement savings, and potentially student loan repayments. This comprehensive guide explains why take-home pay is always lower than gross pay, what each deduction represents, how the PAYE withholding system works, why two people earning the same salary might receive different amounts, and most importantly, why understanding net pay matters more than headline salary figures when planning your budget and financial future.
Gross pay is the total amount your employer pays you before any deductions.
When a job is advertised or offered with a salary, that figure is almost always the gross amount—the starting point before anything comes out.
Think of gross pay as the "advertised price" of your labour. It's what the employer commits to paying you in total, but not what you'll actually take home.
The word "gross" in financial terms means "total" or "before deductions." It's the whole amount, not yet reduced by anything taken out. You might see gross pay referred to as:
Net pay is what actually arrives in your bank account after all deductions have been taken out.
This is your "take-home pay"—the money you can actually spend, save, or use to pay bills. It's what you live on.
The word "net" means "remaining after deductions." Like a fishing net catches some fish but lets water flow through, your net pay is what's left after various deductions flow away to different obligations.
Other terms for net pay:
Net pay is ALWAYS lower than gross pay. There is no scenario where you receive more in your bank account than your gross earnings. Deductions always reduce the amount you take home.
Imagine your income as water flowing from a reservoir (your employer) to your tap (your bank account). Along the way, the flow passes through several pipes that divert portions for different purposes:
You never physically see the deducted amounts. Your employer calculates gross pay, removes all required deductions, and only deposits the remaining net amount to your account. The deducted portions go directly to their respective destinations: IRD gets PAYE and ACC, KiwiSaver provider gets your contributions, student loan account gets repayments.
At minimum, every employee in New Zealand has at least two compulsory deductions:
These two deductions alone mean everyone's net pay is lower than their gross pay. Even if you have no other deductions whatsoever, PAYE and ACC reduce your take-home amount.
The more deductions you have, the bigger the gap between gross and net pay.
A common misconception: "The government takes half my pay!" While deductions do reduce take-home pay, you're not "losing" money in most cases. PAYE fulfills your tax obligation (you'd owe it anyway). ACC buys you injury insurance (you need this cover). KiwiSaver builds your retirement savings (it's still your money, just locked away). Student loan repayments reduce your debt (bringing you closer to debt-free status). Only income tax could truly be considered "lost" income, and it funds public services you use. Frame it correctly: deductions redirect income to obligations and future benefits, rather than making it vanish.
Withholding at source means deductions happen before you receive the money, not after.
Two possible systems for collecting obligations from income:
New Zealand uses System 2 for employees. This is why your payslip shows all those deductions—they're taken out before you ever see them. It's automatic, compulsory, and convenient (once you understand it).
Despite drawbacks, withholding at source is generally considered superior to manual payment systems, which is why nearly every developed country uses it for employee taxation.
PAYE is not a separate tax. It's the system used to collect your income tax throughout the year.
Common confusion: "I pay tax AND PAYE." Wrong. PAYE is your tax, just collected via withholding at source rather than in a lump sum at year-end.
Imagine if everyone had to save up their full year's tax and pay it in one lump sum. Most people would struggle to set aside that much money. They'd spend it, then face a massive bill they couldn't pay. PAYE prevents this by spreading the tax burden across every payday in small, manageable amounts.
Your employer uses a tax code to calculate how much PAYE to deduct. The tax code tells the payroll system:
Different tax codes = different PAYE deductions even on the same gross pay. This is why two people earning identical salaries might see different deductions.
Your payslip shows PAYE deducted each period. Over a year, the total PAYE should approximately equal your total income tax obligation. If you've overpaid, you get a refund. If underpaid, you owe more at year-end. Most employees end up close to square if their tax code is correct.
The ACC levy is compulsory injury insurance, not a tax in the traditional sense.
Every income earner in New Zealand pays ACC Earners' Levy. It's withheld from wages just like PAYE, appears as a separate line on your payslip, and goes to ACC (Accident Compensation Corporation) rather than general government revenue.
You're buying insurance. Just like health insurance or car insurance reduces your disposable income, ACC levy reduces your net pay. The difference: ACC is compulsory and automatically deducted. You can't opt out.
The levy is typically a small percentage of your earnings, much less than income tax, but still a permanent reduction to take-home pay. It's the price of New Zealand's no-fault injury cover system.
KiwiSaver is voluntary retirement savings, but most employees are automatically enrolled and must actively opt out.
If you're enrolled in KiwiSaver, your employer deducts a percentage of your gross pay and sends it to your KiwiSaver provider. You choose your contribution rate within allowed options. Higher rate = more saved for retirement, but lower take-home pay now.
KiwiSaver deduction reduces take-home pay, but the money doesn't vanish. It's redirected to your retirement savings account in your name. You own it. It grows. You'll access it later (usually at retirement age or for first home). Think of it as paying your future self rather than losing income.
But opting out means giving up employer contributions and potential government contributions—effectively turning down free money. Most financial advisors recommend staying in KiwiSaver unless genuinely unable to afford it.
If you have a student loan, repayments are automatically deducted from your pay once earnings exceed a threshold.
Student loan repayment is based on your income. Earn above the threshold: you pay. Earn below it: you don't pay (though interest may still accrue). The more you earn above the threshold, the more gets deducted each pay period.
Student loan repayments can significantly reduce net pay, especially for recent graduates earning moderate to high incomes. The deduction is substantial—enough that many graduates feel financially squeezed despite earning decent salaries.
Seeing a large student loan deduction every payday is demoralising for many. You worked hard, earned a degree, got a job, but a big chunk of your pay immediately goes to debt repayment. However, each deduction reduces your loan balance. Unlike PAYE (which is ongoing forever), student loan deductions eventually end when the loan is fully repaid. There's a light at the end of the tunnel.
Each additional deduction further widens the gap between gross and net pay.
Important distinction: Some contributions come from the employer, not from your pay.
If you're in KiwiSaver, your employer must contribute a percentage of your gross pay to your KiwiSaver account. This is in addition to your salary, not deducted from it. It doesn't appear as a deduction on your payslip because it's not coming from your pay—it's extra money the employer pays on your behalf.
Employers pay tax on their KiwiSaver contributions for you. This tax (ESCT) is deducted from the employer contribution before it reaches your KiwiSaver account. You don't pay ESCT—your employer does. It slightly reduces the employer contribution amount that lands in your KiwiSaver, but it doesn't reduce your take-home pay.
Key point: Employer contributions and ESCT don't affect the journey from gross pay to net pay. They're separate transactions that benefit you but aren't part of your wage flow.
Your gross pay is what the employer pays you directly. But the employer's total cost of employing you is higher—it includes employer KiwiSaver contribution, ACC Work Levy, and other on-costs. From the employer's perspective, you cost more than your salary. From your perspective, you receive your gross pay minus deductions. The employer's extra costs don't increase your gross pay or reduce your net pay—they're separate employer obligations.
You and your colleague both earn identical gross salaries, but your bank deposits differ. Why?
If you have different tax codes, PAYE deductions differ. Common scenarios:
Tax code differences can create substantial variation in PAYE withheld, directly affecting net pay.
KiwiSaver allows different contribution rates. If you contribute at a higher rate than your colleague, more is deducted from your pay, reducing your net pay. Their lower contribution rate means higher take-home pay, but less retirement savings.
If you have a student loan and your colleague doesn't, you have an extra deduction they don't. This can make a significant difference to net pay, especially at moderate to high income levels.
You might have union fees, payroll giving, or other voluntary deductions. Your colleague might not. Each additional deduction reduces your net pay relative to theirs.
Court-ordered deductions like child support only affect some people. If you have these obligations and your colleague doesn't, your net pay will be lower despite identical gross pay.
Lesson: Never assume someone else's net pay matches yours just because you have the same job title or salary. Individual circumstances create wide variation.
Employee: Receives net pay only. Never sees gross amount. Easy to budget because what arrives is what's available to spend.
Contractor: Receives gross amount initially. Feels wealthier temporarily. Must resist spending money owed for tax/ACC/student loan. Requires discipline to set aside funds for obligations due later. Risk of cashflow crisis if not managed carefully.
Many contractors struggle with this. Getting paid gross feels like having more money, but a significant portion is actually owed elsewhere and must be paid eventually. Contractors must mentally simulate the employee experience by immediately setting aside the "would-be-deducted" amounts.
Common complaint: "My bonus/overtime got taxed at a higher rate! I barely got anything!"
New Zealand's tax system is progressive—higher earnings get taxed at higher rates in upper brackets. When you receive a bonus or work significant overtime, that extra income might push portions of your earnings into higher tax brackets. PAYE systems often withhold at higher rates on irregular payments to avoid under-withholding.
You worked extra hard or earned a bonus, expecting a big boost to your bank balance. Instead, you see a large chunk withheld for PAYE. It feels like you're being punished for earning more.
You're not being punished. The tax system is working as designed—more total income means more total tax. The bonus/overtime increases your annual income, which can push you into higher tax brackets. PAYE withholds accordingly.
Additionally, if the bonus or overtime payment is large, the payroll system might treat it as if you earn that amount every period, temporarily withholding as though you're in a higher income bracket. This can over-withhold, but you'd get a refund at year-end when your actual annual income is reconciled.
If too much PAYE was withheld from irregular payments, you get a tax refund after filing your annual tax return. The system balances out over the full year, even if individual pay periods look skewed.
Your payslip is more than a receipt—it's a detailed record of income movement.
Keep your payslips. Digital or physical, maintain a record. They're valuable financial documents you may need years later.
These deductions happen automatically. You can't opt out. They reduce net pay whether you like it or not.
These deductions are under your control. You can increase, decrease, or eliminate them (though some choices, like opting out of KiwiSaver, have long-term consequences).
Every life change affecting income or deductions alters the gross-to-net calculation. Stay aware of your payslip when circumstances change.
Reality: Total deductions (PAYE + ACC + student loan + KiwiSaver) might feel like half, but:
Reframe: Some goes to tax, but other deductions serve you directly.
Reality: Employer isn't keeping anything. They're legally required to deduct and remit your PAYE, ACC, KiwiSaver, and student loan payments. They're acting as intermediary, not profiting from your deductions.
Reality: Negotiate on gross, but budget on net. Gross pay determines your negotiating position and how your offer compares to others. But net pay determines your actual living standard and what you can afford. Always mentally convert gross offers to estimated net before making financial commitments.
Nuance: High earners pay more tax in absolute terms, and higher percentages on upper income portions. But they also retain more absolute income. Someone earning more gross also has more net, despite paying more tax. Progressive taxation reduces inequality but doesn't make high earners worse off than low earners in absolute terms.
Reality: Tax refunds mean the PAYE withholding system over-withheld slightly, usually due to irregular income, tax code issues, or claimable expenses. You didn't "overpay tax"—the withholding estimate was slightly high, and the annual reconciliation corrects it. Conversely, tax bills mean you under-withheld. The goal is to get close to zero at year-end.
Quiz on Take-Home Pay Understanding
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