For most New Zealanders, employment tax is the most significant tax they pay — and the most common source of unexpected tax bills or overpayments. PAYE is deducted automatically by your employer, but using the wrong tax code, failing to account for secondary income, or not understanding how bonuses are taxed can leave you with a surprise at the end of the tax year.
Getting Your Tax Code Right
The most important employment tax action you can take is using the correct tax code. Your tax code tells your employer how much PAYE to deduct. The standard tax code for most employees with no student loan and one job is M (main income). If you have a student loan, you use M SL. If you have secondary income from a second job, different rates apply.
Using the wrong tax code — particularly a lower deduction rate than your actual income requires — results in a tax bill at year-end. Using too high a rate means overpaying and waiting for a refund. IRD issues automatic income tax assessments to most New Zealanders at the end of each tax year (April 1 to March 31), and most people receive a small refund or bill based on their PAYE deductions.
Secondary Tax
Secondary income — a second job, freelance income, or rental income alongside employment — is taxed differently. Many people don’t realise that receiving a second income without adjusting their tax code can result in underpayment, because each payer treats their payment as if it’s your only income. IRD’s automatic year-end assessment catches most underpayments, but it’s better to get the tax code right upfront.
Redundancy and Bonus Payments
Lump sum payments like redundancy packages and annual bonuses are taxed using the “extra pay” method. This is often confusing because the tax deducted on these payments appears very high — sometimes 39% — even for people who normally pay 17.5% or 30%. The extra pay method calculates tax based on your annualised earnings including the lump sum, which often pushes the marginal rate up temporarily. You may receive a refund at year-end if the tax deducted exceeds your actual liability.
Guides in This Section
- NZ Tax Codes Explained — M, ME, S, SH, ST, CAE and every other code
- Student Loan Repayments and PAYE — how student loan deductions work through your employer
- Independent Earner Tax Credit (IETC) — who qualifies and how to claim the $520 credit
- ESCT — Employer Superannuation Contribution Tax — how KiwiSaver employer contributions are taxed
- Redundancy Tax NZ — how lump sum redundancy payments are taxed
- Bonus Tax NZ — why bonuses look overtaxed and how the extra pay method works
- Salary Sacrifice NZ — KiwiSaver voluntary contributions and ACC effects
- Employer PAYE Guide NZ — payday filing, deductions, IR330, payroll software
- Holiday Pay Tax NZ — how annual leave is taxed