Lower Income tax rates in 2010 Budget

Posted on 20 May 2010

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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

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.