Guide
How your income tax is worked out
New Zealand taxes people, not income streams. At the end of the year, IRD adds up everything you earned - salary, self-employed commission, rent - and applies the tax brackets to the total. Tax App follows the same rule, which is why it sometimes asks about income it never even records, like your salary. This page explains the whole calculation, for every combination of income you might have.
One stack, filled from the bottom
The tax brackets are steps: the first slice of your annual income is taxed at the lowest rate, the next slice at a higher one, and so on. Only the income inside each band pays that band's rate. The consequence that matters here is that where income sits in the stack decides what it costs you. Ten thousand dollars as your only income is taxed gently at the bottom rates. The same ten thousand on top of a salary is taxed at whatever rate your salary has already climbed to.
So the app treats your year as one stack, filled in a fixed order:
- Your PAYE salary, if you have one. Its own tax is already deducted by your employer, so the app never shows tax for it - but it sits at the bottom of the stack and pushes everything else up the brackets.
- Commission or contracting income stacks on top of the salary. The tax shown is the difference between the tax on (salary + commission) and the tax on the salary alone - exactly the extra the commission causes.
- Rental income stacks on top of both. Again, only the change it causes is shown.
Because every figure is the difference between two points on the same curve, the parts always add up to the year's true total - to the cent, not approximately.
Every combination
| Your income | How it is taxed |
|---|---|
| Commission only | Taxed from the lowest bracket up, exactly as the IRD calculator would show it. |
| Rental only | Also taxed from the lowest bracket up - with nothing underneath, the rent fills the cheap bands first. |
| Salary + rental | Rental is taxed on top of the salary, at the rates the salary has already climbed to. The salary itself shows no tax here - your employer has that covered. |
| Commission + rental | Commission is taxed from the bottom; rental is taxed on top of the commission. |
| Salary + commission | Commission is taxed on top of the salary. |
| Salary + commission + rental | The full stack: commission on top of the salary, rental on top of both. Nothing is ignored - a salary never stops counting just because commission exists. |
A worked example
Suppose you earn an $80,000 salary, $30,000 of commission (after GST), and $10,000 of rent. Using the current brackets, tax on $80,000 alone is $16,277.50 - paid through PAYE, so the app shows nothing for it. Tax on $110,000 is $26,177.50, so the commission's share is the difference: $9,900. Tax on $120,000 is $29,477.50, so the rental's share is $3,300. Every extra dollar landed in the 33% band, because the salary had already used up the cheaper ones.
Now remove the salary from the picture - which is what happens if you never tell the app about it. That same $30,000 of commission taxed from the bottom comes to $4,158 before credits: less than half the true figure. This is why the app asks for your salary, and why it matters that it is recorded. You enter it once, under Settings, PAYE salary, against the person who earns it - an organisation can have several earners, each with their own.
The same rule, record by record
The app does not wait until year end. Every income record in your list carries its own tax figure, worked out as the step that record adds on top of everything earned before it in the same year. Two identical rent payments can therefore carry different tax - the fortieth payment of the year sits higher in the stack than the first - and that is correct, not a bug. The steps always add up to the year's total, which is what the dashboard shows as the amount to set aside.
The two other pieces
The ACC earner levy is charged on earnings from work - salary and commission, never rent - at a set rate up to a yearly maximum. The maximum spans all your earnings together, so if your salary has already used most of it, your commission is only levied on what headroom remains.
The independent earner tax credit is applied once, on your total income, not per stream. If extra rental income pushes your total past the credit's ceiling, the credit you lose is counted as part of the rent's cost - which is the honest way to price it.
What the figures are, and are not
Every rate involved - the brackets, the levy, the credit - is dated configuration, so past years keep the rates that applied at the time, and you can check any figure against the IRD calculator. The result is a well-founded estimate to set money aside against. It is not a tax return and not advice: the app does not know about student loans, KiwiSaver, losses carried forward, or anything outside the organisation. Final numbers belong to you, your accountant, or myIR.
Where to go next
- Reconciling your bank - make sure the records the tax is calculated from are actually right.
- Xero - keep your accountant's books in step without typing anything twice.