Residual income tax is the amount of tax that’s left to pay after all tax credits have been applied, but before any provisional tax prepayments have been considered.
Still confused? Wouldn’t it be great if someone could explain these terms in simple words, with simple examples, and no jargon?
Fear no more. We’re here to lay it all out. In the words of rapper/dancer/pants pioneer, the great MC Hammer, let’s break it down.
If we oversimplify the structure of an income tax return, we might be looking at something like this:
| Concept | Definition | Example |
|---|---|---|
| Total taxable income | The sum of all your income earned. Salary, self-employment, interest, PIE, property, et al. | Salary: $20k Schedular income: $20k Self-employment: $20k Interest: $5k TOTAL: $65,000.00 |
| apply effective tax rate | Your actual tax rate, taking into account different tax rates across different income tax brackets. | For $65,000.00 of taxable income, an effective tax rate of 19.26% is applicable |
| Tax on taxable income | Tax payable on your taxable income. | $12,520.00 |
| minus | ||
| Total tax credits | Tax already deducted from your income, such as PAYE or withholding tax. Also, reductions on tax payable from charitable donations or IETC. | PAYE: $3,000.00 Withholding tax: $4,000.00 TOTAL: $7,000.00 |
| equals | ||
| Residual income tax (RIT) | The end result of your income tax return. | $5,520.00 |
| minus | ||
| Tax prepayments and provisional tax paid | Income tax paid in advance during the financial year, usually provisional tax instalments or voluntary prepayments. | Tax prepayments through Hnry: $6,000.00 |
| equals | ||
| Total tax to pay | The payment that IRD will be expecting after your return is filed and processed. | -$480.00 (refund) |
Now, let’s revisit that initial definition.
Residual income tax is the tax bill you get as a result of your income tax return, after all tax credits have been accounted for, but before your tax prepayments have been considered. That’s not so confusing anymore, thank you Mr. Hammer.
Yet, while all of that is quite informative, wouldn’t it be great if you could just forget about it?
At Hnry, we calculate, deduct, and pay your tax as you earn. This means that if you keep your i’s dotted and your t’s crossed, we’ll make sure that your prepaid tax will be enough to cover the end bill of your income tax return. Your RIT will be RIP.
