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Why we can’t just fix secondary tax

by Deborah Russell

“What are you going to do about secondary tax?” people ask me.  “It’s not fair to charge people more tax just because they’ve got a couple of part time jobs.”

It’s a common mistake.  And it’s easy to understand why people think they’re paying more tax.  If you have two jobs, each paying $250 a week before tax, then in the first job, you will end up with about $220 in your pocket, and in your second job, you will end up with $202 after tax and ACC has been deducted.

Here’s the problem.  If you didn’t pay secondary tax, and just paid the same amount of tax on each job, then at the end of the tax year, you would end up a big tax bill.

Here’s how it works.  NB: for the purposes of this example, I’m just using tax rates, so I’m ignoring the ACC levy.

First up, you need to remember that the tax you are paying is income tax.  You pay income tax on all the income you earn during a year.  If you are a wage or salary earner, then in order to make paying tax easy, it gets deducted out of your wages as you earn it.  The PAYE (Pay As You Earn) tax you see deducted is not actually a tax: it’s a down payment on your tax bill for the year.

If you have one job earning $50,000 before tax, then over the year, you should have a$8,020 PAYE deducted, leaving you with $41,980 in your back pocket.

(You can check the actual tax rates and calculate tax for yourself, if you like.  Or you could just trust me on this.)

At the end of the tax year on 31 March, you should end up with no extra tax to pay, because the correct amount will have been deducted throughout the year.

Income                                                           $50,000

Tax on income                                               $8,020

Less Tax already paid as PAYE                    $8020

Balance for you to pay                                  $0

But what say you have two jobs, each earning $25,000?  Each of your employers will deduct the right amount for someone earning $25,000 a year.  That’s $3,395 per job, and during the course of the year, you will have $6,790 deducted from your wages.

The problem is, you still have to pay tax on $50,000 of income.

Income                                                           $50,000

Tax on income                                               $8,020

Less Tax already paid as PAYE                    $6,790

Balance for you to pay                                  $1,230

If you don’t pay secondary tax, and only pay ordinary old PAYE, you end up with a stonking great tax bill at the end of the year.

The secondary tax rates fix this problem, more or less.  Your main job gets taxed at ordinary rates, but then you pay a higher rate on your second job, so you don’t get caught out with a big amount of tax to pay at the end of the year.

On the first main job where you earn $25,000, you have $3,395 PAYE deducted.  On your second job, where you also earn $25,000, PAYE is calculated using the secondary tax rates, so you have $7,500 deducted.

(You could look up the secondary tax rates and calculate this for yourself if you like, or you could just trust me, again.)

At the end of the year, your tax calculation would look like this.

Income                                                           $50,000

Tax on income                                               $8,020

Less Tax already paid as PAYE                    $10,893

Refund!                                                          $2,873

So much nicer to get a refund than to end up with more tax to pay.

Of course, you might well have had quite a big cashflow problem during the year.  You might have preferred to have that $50 or so per week to spend when you needed it, instead of getting it all as one big lump sum in a refund.  But at least you don’t owe money.

You can apply to IRD to get a special rate to use for your second job if you’re going to end up in that kind of situation.  But most people don’t know about that, and they find dealing with IRD a bit worrying.

Even getting the refund can be daunting.  You have to get tax records and fill out a tax return.  The IRD’s website has plenty of information about how to do that, which is fine if you’re internet-savvy and comfortable with numbers.  But most people glaze over a little when confronted with tax.

There’s almost certainly a technological fix for all this but it will require a new IRD computer system.  In the meantime, we’re stuck with secondary tax rates and filing tax returns at the end of the year.  And the big problem with just cutting secondary tax rates remains: if you do that, then all that happens is that you have to pay more tax at the end of the year.

Deborah Russell is a lecturer in taxation at Massey University.  She is the Labour candidate for Rangitīkei in the 2014 General Election.

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