Secondary tax on the way out
Whatever the outcome of September’s election, it seems ‘‘secondary tax’’ is on the way out.
Secondary tax is unpopular with low to middle income earners due to being overtaxed during the year and getting it back as a year-end tax refund.
The primary tax codes work by annualising each pay period to determine the amount of tax to pay. The system is accurate for taxpayers with one source of PAYE income. For example, an employee who earns exactly $14,000 in her primary job will have tax withheld at 10.5 per cent.
In reality income earned from secondary jobs will almost never fit squarely in one tax bracket. Wages can also vary from week to week making it hard to estimate annual income when selecting a PAYE code.
If she takes a second job earning $7000 per annum, the full $7000 should be taxed at 17.5 per cent. The employee should choose tax code ‘‘S’’ for her second job.
In reality income earned from secondary jobs will almost never fit squarely in one tax bracket. Wages can also vary from week to week making it hard to estimate annual income when selecting a PAYE code. This means employees are often overtaxed on their second and subsequent jobs.
These employees claim the overpaid tax by filing a personal tax summary at the end of the year. This is cold comfort for people who need the cash during the year.
At this stage it is unclear how the PAYE system will accurately tax income from secondary jobs.
It is likely the new system will require a real-time online calculation for each pay period. It remains to be seen if this will add to employers’ payroll costs or require some employers to outsource their payroll function to payroll intermediaries.
Labour is proposing an implementation time of five years and National, two years. Its impact will be felt most by the tax refund industry. While many PAYE taxpayers look forward to receiving an annual tax refund, the removal of secondary tax and a move to real-time PAYE will see the end of the annual ‘‘woo hoo’’ moment. Greg Harris
Greg Harris is a specialist tax partner in the Hamilton office of Deloitte. Email gharris@deloitte.co.nz