WELLINGTON (CU)_Last week, the government of New Zealand announced plans to increase the minimum wage from the current $20 an hour to $21.20 from 1 April. The move was aimed at supporting many Kiwis who have gone “above and beyond” in the country’s fight against COVID-19, according to Workplace Relations and Safety Minister Michael Wood. However, according to tax experts, the decision will push a selected group of minimum wage workers to the near middle tax bracket, highlighting the problems with New Zealand’s system.
The 6 per cent increase would mean that those working 40 hours a week will be earning $44,096 a year. However, if they worked a 43-hour week at the minimum wage, they will be pushed to the top of the 17.5 per cent tax bracket, meaning they will be taxed at 30 per cent for any extra income earned. This owing to the marginal tax rate system under which New Zealand operates. For the first $14,000 earned by a Kiwi, a tax rate of 10.5 per cent applies, and any income between $14,000 and $48,000 is taxed at 17.5 per cent. A 30 per cent rate applies for earnings between $48,000 and $70,000 is 30 per cent, and 33 per cent for $70,000 and $180,000. Any amount over that is annually is taxed at 39 per cent.
This does not mean that if you earn $49,000, you will be paying 30 per cent on your entire salary. Instead, only the additional $1,000 will be in the 30 per cent tax band. Nevertheless, Deloitte partner Robyn Walker is of the view that the fact that even people on the minimum wage could fall into the middle of the tax bands highlighted a problem. “It does serve to highlight that our marginal tax rate settings do not seem right, and in particular the threshold for the 30 per cent – and by implication the 33 per cent – rate is too low,” she said.
She pointed out that minimum wage workers would benefit only 96c an hour from the $1.20 increase due to increases in ACC levies and tax as a result. In other words, their ACC levy will increase from $578.24 a year to $643.80 after 1 April, while they will also pay an extra $436.80 in tax. Echoing her views, National MP Simon Bridges said it was wrong that workers on the minimum wage were so close to the next tax bracket.
“The minimum wage has been increased 6 per cent to deal with inflation. If that was the end of the story, minimum wage workers would be standing still, treading water. But people who work 44 hours a week move into the 30 per cent tax bracket,” he noted. “Many minimum wage workers, as a result of the Government’s kindness, will be worse off.”
