Effective tax rates in NZ, Aus and the UK
With the New Zealand Government's announcement of income tax cuts in the May 2010 Budget, how do New Zealand's income tax rates stack up against those of countries our young emmigrees flock to? (Namely Australia and the UK).
In two words, "surprisingly well".
When looking at headline tax rates a person earning the average wage in New Zealand will have an effective income tax liability of just 16%, compared with 18% for average wage earners in the UK and 20% in Australia (as of 1 October 2010 once the new NZ tax rates come into effect).
Actual gross rates will vary depending on an individual's situation as extra tax and insurances are applied (ACC in NZ, Medicare in Aus, etc.) and certain rebates or benefits may be claimed (working for families in NZ, accommodation allowances in Aus, etc.)
| Avg. Salary | Tax Rate | |
|---|---|---|
| New Zealand | NZD 49875 | 16.00% |
| Australia | AUD 67116 | 20.39% |
| United Kingom | GBP 25428 | 18.08% |
In local currency terms New Zealand's new tax rates really shine against the competition, with effective rates coming in lower for all incomes over $44000/annum.
When comparing salaries converted into NZD the picture isn't quite so clear, though the New Zealand tax rates do come in lower for higher salaries of around $150,000 and over. However conversion into NZD is fairly meaningless without considering the relative cost of living in each country.
With large fluctuations in currency exchange rates over the last year it is hard to get a meaningful perception of relative purchasing power between the countries.
Until some official PPP figures are released we'll confine this analysis to the headline figures above and a comparison of tax rates at multiples of the average wage in each country.
| @ Avg. Wage | @ Twice Avg. Wage | @ Thrice Avg. Wage | |
|---|---|---|---|
| New Zealand | 16.00% | 23.90% | 26.93% |
| Australia | 20.39% | 28.02% | 31.86% |
| United Kingom | 18.08% | 24.33% | 29.55% |
Again the NZ income tax rates come out on top - lower for a range of comparable income levels.
Although tax isn't everything, would-be economic migrants may wish to re-evaluate their decisions based on the 2010 budget announcements.
Average earnings figures were sourced from Statistics New Zealand, Australian Bureau of Statistics and the Office for National Statistics UK.
Lower Income tax rates in 2010 Budget
Finance Minister Bill English has delivered substantial income tax rate cuts in the 2010 Budget, while simultaneously increasing value-added tax and making it more difficult for wealthier individuals to manipulate their tax position.
Income tax rates are dropping across the board meaning that the extra after-tax income should more than offset the higher GST rates for the majority of wage earners. The new income tax rates will come into effect in October 2010.
Tax thresholds are being kept at present levels of $14000, $48000 and $70000 so many people will have their incomes creep into higher tax brackets. (Though given that wage inflation has been low over the last year this is unlikely to be of major concern).
Tax rates effective as of 1 October 2010:
(excluding ACC and rebates)
| old rate | new rate | on annual earnings |
|---|---|---|
| 12.5% | 10.5% | up to $14,000 |
| 21.0% | 17.5% | between $14,001 and $48,000 |
| 33.0% | 30.0% | between $48,001 and $70,000 |
| 38.0% | 33.0% | over $70,000 |
For example, a specialist earning $100,000 per annum would pay tax as follows:
| 14000 * 0.105 | = | $1470 |
| (48000-14000) * 0.175 | = | $5950 |
| (70000-48000) * 0.30 | = | $6600 |
| (100000-70000) * 0.33 | = | $9900 |
| $23920 |
Thus making a total tax bill of $23,920 or an effective income tax rate of 23.9%. This is substantially lower than the comparable effective rate of 27.6% payable on 2009 tax rates.
In addition to income tax rates, a number of other tax changes were announced in the budget, including a drop in the company tax rate to 28% for the 2011/2012 year, tightening of tax on property investment and a raise in the GST rate from 12.5% to 15%.
The 2010 Budget was all about rebalancing of the tax base - lowering income tax to promote higher productivity, increasing consumption taxes to encourage savings, and hitting unproductive income such as returns from property investment.
All and all, a win for wage and salary earners across the income spectrum.
1.1% drop in unemployment - are salaries set to improve?
Only two days ago we showed how average wages have flat-lined over the last few months. But today there was a surprise drop in the unemployment rate from 7.1% to 6.0%, possibly indicating that salaries will again start to increase.
The Household Labour Force Survey released by Statistics New Zealand today showed that unemployment dropped by 25,000 over the March 2010 quarter while employment grew by 22,000 people, giving a net seasonally adjusted drop in the unemployment rate of 1.1%.
Will salaries increase?
Indications so far are that Consumer Price Inflation remains subdued, and although the unemployment rate has improved, at 6% it is still high compared with rates of recent years (prior to 2009). Therefore there may still be a little slack to pick up in the labour market before strong wage competition starts to kick in.
It's also too soon to tell whether the March unemployment rate is an anomaly, but the large drop does give weight to the idea that the market has reached its turning point. Further support for rising wages comes with the Reserve Bank's recent indication that OCR increases are on the cards, perhaps as soon as next month.
The time may be near to ask your boss for a long overdue pay-rise.
Average wages in 2010 are going nowhere
If you got a pay rise after Christmas then count yourself lucky; Figures released by Statistics New Zealand this week show that average hourly earnings over the last few months have remained stubornly static.
Although average earnings (including overtime) have increased year-on-year by around 2% since March 2009, much of that gain occured during the first half of 2009, and the year-on-year average earnings growth compares poorly with recent prior years of 5.3% to March 2009 and 4.6% to March 2008.
According to the Quarterly Employment Survey (QES), average weekly earnings in New Zealand were $959.13 as of March 2010. This is composed of average earnings of $1050.53 for men and $857.73 for women. These numbers reflect the total average earnings, i.e. wage or salary plus overtime pay and benefits.
Expect a lower salary payment in April
Back in December the Government announced an increase in ACC levies which are due to take effect as of next week.
Employees' levies will increase from $1.70 per $100 of earnings to $2.00 per $100 of liable earnings, capped at a maximum of $2,200.36 per year (earners' levy is only charged on the first $110,018 of earnings).
These ACC levy increases follow on the back of substantial increases incurred last year - the earners' levies are up over 40% since March 2009.
Who pays ACC earners' levy? Pretty much everyone who earns income from a salary, wage or self-employment income. Non-labour income such as rents and royalties are exempt.
Minimum wage to increase $0.25c
After much speculation and debate the Government has announced a small increase in the minimum wage, to come into effect on 1 April 2010.
The standard (adult) minimum wage will increase 25 cents to $12.75 per hour. That's equivalent to $102 for a standard 8 hour day, or $26,520 per year.
The new entrants minimum wage will increase 20 cents to $10.20 per hour ($81.60 per day, or $21,216 per year).
According to the Beehive website,
"The Government is focused on the need to find a balance between protecting jobs and ensuring a fair wage."
"We do not want to see workers priced out of the market, but we are confident that a 25c increase, in line with inflation, will not overly harm or discourage businesses from taking on new staff."
There have been calls by Unite to increase the minimum wage to $15 per hour, a 20% increase on the current minimum wage, but these calls have been rejected by the Goverment as unreasonable in the current challenging economic climate.
A Tax System for New Zealand's Future - TWG Report - Jan 2010
Victoria University's Tax Working Group issued their much-awaited report today containing recommendations on what is needed to create a world-class tax system in New Zealand. The report (entitled "A Tax System for New Zealand's Future") will hold a lot of weight in shaping tax policy within the current Government, with some of the recommendations likely to be featured in May's Budget (though likely in a modified form).
The report contains 13 key recommendations in summarised form,along with around 70 pages of details and background information. The full report can be read here.
Summary of the Tax Working Group's Recommendations
(From the point of view of a NZ salary or wage earner)
(1) The company, top personal and trust tax rates should be aligned to improve the system's integrity...
Assuming the tax alignment is at rates lower than the current ones this can only be viewed as a positive for salary earners. It will help to create a fairer system whereby there are less loopholes and incentives for richer Kiwis to lower their taxable income where ordinary New Zealander's are unable to.
(2) New Zealand's company tax rate needs to be competitive with other countries' company tax rates, particularly that in Australia...
Obviously a very important point in order to keep New Zealand companies competitive and to discourage companies from relocating overseas.
(3) The imputation system should be retained. However, this may need to be reviewed if Australia decides to move away from its imputation system.
A neutral recommendation for many salary earners, however dividend imputation does encourage more diverse investment (or specifically, it doesn't discourage investment in companies - and we need our companies to be strong if they are to be able to grow and pay internationally competitive salaries).
(4) The top personal tax rates of 38% and 33% should be reduced as part of an alignment strategy and to better position the tax system for growth. Where possible, the Group would like to see a reduction in personal tax rates across-the-board to ensure lower rates of tax on labour more generally...
An excellent recommendation for New Zealand workers. This would have the effect of increasing take-home pay for a large chunk of New Zealand's population.
(5) Base-broadening is required to address some of the existing biases in the tax system and to improve its efficiency and sustainability...
We all know that income tax cuts will have to be paid for somehow - and base broadening is one alternative (reduced Government spending is the other). From the point of view of a wage or salary earner, broadening of the tax base is likely a positive recommendation.
(6) The most comprehensive option for base-broadening with respect to the taxation of capital is to introduce a comprehensive capital gains tax (CGT)... most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT...
A comprehensive capital gains tax would be politically very difficult to implement in New Zealand, and the Tax Working Group have recognised this.
(7) The other approach to base broadening is to identify gaps in the current system... The majority of the TWG support detailed consideration of taxing returns from capital invested in residential rental properties on the basis of a deemed notional return calculated using a risk-free rate.
This recommendation is neutral from a worker's point of view, though everyone is likely to be affected from the flow-on effects. We may see rents rise and house prices fall - a scenario that will disadvantage some people but provide a lot of opportunity and incentive for people to own their own home.
(8) Most members of the TWG support the introduction of a low-rate land tax as a means of funding other tax rate reductions.
Neutral from a worker's point of view, but sure to create some controversy in some sectors of the economy.
(9) The following targeted options for base-broadening should be considered for introduction relatively quickly:
- Removing the 20% depreciation loading on new plant and equipment.
- Removing tax depreciation on buildings (or certain categories of buildings) if empirical evidence shows that they do not depreciate in value.
- Changing the thin capitalisation rules by lowering the safe harbour threshold to 60% or by reviewing the base for calculating this measure.
The point here seems to be to encourage investment. Though this is not likely to affect workers much in the short term, over the longer term companies will rely less on the availabilty of cheap labour and more on new technology and highly skilled (highly paid) workers.
(10) GST should continue to apply broadly. There should be no exemptions.
This makes sense from an administrative point of view but does mean that lower-income families will feel more of a hit from increased GST rates, e.g. on food.
(11) Most members of the Group consider that increasing the GST rate to 15% would have merit on efficiency grounds because it would result in reducing the taxation bias against saving and investment...
As a consumer then any increase in GST is unwelcome - but if this is what is required in order to receive substantial personal income tax cuts then it is a positive as part of the big picture. Increased saving and investment will help everyone over the long term.
(12) There should be a comprehensive review of welfare policy and how it interacts with the tax system, with an objective being to reduce high effective marginal tax rates.
Working for Families has been controversal and not without reason. Although the tax credits are very welcome (even necessary) for many families there has been an unintended and perverse effect on marginal tax rates; Marginal tax rates can be in excess of 50% in some cases. This has created a disincentive to work harder and created a strong incentive to avoid tax by means of structuring ones income through companies, trusts and other methods. So a comprehensive review of welfare policy and how it interacts with the tax system sounds like a good idea.
(13) Government should introduce institutional arrangements to ensure there is a stronger focus on achieving and sustaining efficiency, fairness, coherence and integrity of the tax system when tax changes are proposed.
Agreed.
ACC levies to increase in April 2010
The Government has announced that ACC levies will increase next year in order to compensate for a 57% increase in ACC claims over the last four years.
ACC levies are set to increase for workers and employers from 1 April 2010, and for drivers from 1 July 2010.
The Earners' Levy will increase from 1.7% to 2.0% of liable income, probably capped at around $2000 per year (the current cap is $1810.04/year).
These increases to the Earners' Levy mean that someone on an annual salary of $50,000 can expect to pay an additional $150/year ($12.50/month) from 1 April 2010, while someone on a salary of $100,000 will face ACC levey increases of $300/year.
Although substantial, the ACC levy increases are less than those proposed by the Accident Compensation Corporation.