It’s that time of year again – leaves are falling, the weather’s getting cooler, and finance nerds (like us) are busy digesting the hottest new release: Budget 2025.
Released on the 22nd of May, this year’s budget contained quite a bit of reprioritisation of government spending, much of which may impact our day-to-day lives. But one particular proposal caught our attention, and not in a good way.
If you’re a sole trader, the new KiwiSaver changes may negatively impact your retirement savings. So, let’s go through the changes: what’s new, what the impact is, and what you can do about it.
- A quick refresher on KiwiSaver
- How KiwiSaver currently works for sole traders
- What the government is changing
- What the changes mean for sole traders
- What you can do about it
A quick refresher on the KiwiSaver scheme
In Aotearoa, you begin receiving government superannuation and other pension payments at the age of retirement, currently set at 65. Whether or not you actually retire at that point is irrelevant – you’ll still receive the weekly payments (if you’re eligible).
The problem is that as time goes on and inflation eats away at the value of the NZ dollar, it’s difficult to maintain a level of superannuation that covers all living expenses. Especially as demographics shift and change – more people are living well into their golden years (which is wonderful!), meaning they need to be supported for longer.
In order to help more people retire comfortably, and better bear the costs of retirement, the government launched KiwiSaver in 2007. The idea is that people would begin putting more of their own money into an investment fund that would grow into a nice little nest egg for their old age.
While KiwiSaver has been tweaked over the years, here’s how the system currently works:
- You can opt into the scheme at any time, with added benefits once you turn 18 up to retirement age
- If you work for an employer, you’re required to contribute a minimum of 3% of your post-tax salary towards your KiwiSaver
- Your employer is required to match your contributions – so pay an additional 3% into your fund
- Every June, the government will match your contributions by $0.50 to the $1, up to a maximum of $521.43. So, if you contribute $1,043 before the cut off date, you will receive the full government contribution of $521.43.
That’s about it really – simple, straightforward, no other bells and whistles.
KiwiSaver and sole traders
If you’re a sole trader, you may have noticed that you’re missing out on a massive part of the benefit of having a KiwiSaver – the employer contributions. It’s a cool extra 3% that can really make a difference, especially after the magic of compounding returns!
It’s not just sole traders who miss out here though – it’s low income earners, stay-at-home parents (typically mothers), and anyone else currently unemployed. Not contributing as much to your KiwiSaver fund now makes a real difference when it comes to retirement – sometimes hundreds of thousands of dollars. If you’ve ever heard of the “motherhood penalty”, this (in part) is what it’s referring to.
That’s why that last big KiwiSaver benefit – the government contribution – was so crucial for people who fall into this category. It was an easy way to give KiwiSaver balances a boost, and often the only incentive for people to actually pay into their funds – especially those on a limited income.
Which brings us to –
What the government is changing
There are three major changes the government plans to enact:
1. Lowering the age threshold for benefits to age 16
The first is fairly straightforward – while anyone at any age can join KiwiSaver, you’ll now be eligible for employer and government contributions from the age of 16. This means two more years of extra contributions to start saving and accumulate growth, especially for employees who are eligible for employer contributions.
Speaking of which –
2. Increasing employer contributions
There have been plenty of studies about the benefits of increasing KiwiSaver contributions.
Alongside helping people retire comfortably, KiwiSaver funds could potentially be invested into local businesses, infrastructure, and commodities, which would in turn boost the economy. It would take the heat off the superannuation system, possibly helping allow for means testing, and for some of those funds to be reprioritised.
Basically, making sure Kiwi are financially sorted could be a win-win situation, as well as a no-brainer.
The good news is that the current government agrees with this approach: the biggest change they’re making to the KiwiSaver scheme is to increase the employer contribution rate from 3% to 3.5% next financial year, before raising it again to 4% the year after that.
It’s important to note that employees will still be able to stick to a lower rate of 3%, if they aren’t currently able to contribute more. In this case, their employer would only need to match their contribution of 3%. This measure is temporary though – eventually, everyone will be required to contribute 4%.
3. Slashing the government contribution
The flipside of this measure, however, is that the government contribution will be halved starting 1st July 2025.
(💡 If eligible, you’ll still receive the full contribution this year.)
What this means is that instead of getting $0.50 for every dollar you contribute up to a maximum of $521.43, you’ll now only receive $0.25 per dollar, up to a maximum of $260.72.
Once you hit the earnings threshold of $180,000, you’ll no longer be eligible for this benefit.
What the changes mean for sole traders
In theory, lowering the age of eligibility and increasing employer contributions more than make up for the halving of government contributions.
If you plug some numbers into Sorted’s new KiwiSaver calculator, you’ll see the potential difference in savings for employees, come the age of retirement.
The problem for sole traders is that they don’t have an employer, meaning the government contribution was the only real incentive they had to put money into KiwiSaver. On top of this, halving the government contribution means a dramatic drop in the estimated final retirement amount, potentially up to 17%.
It almost goes without saying that this isn’t great for sole traders – especially those who don’t work a PAYE job part time. The numbers bear this out – in 2024, approximately 200,000 KiwiSaver members only received the government contribution as a benefit, including approximately 125,000 people who were self-employed.
Halving the government contribution is a double whammy for this group – there’s less incentive to contribute to their KiwiSaver funds in the first place, and they’ll generate less returns on a smaller amount.
What you can do about it
We’re not going to lie – as cheerleaders and advocates for all things sole trader, we’re not very enthusiastic about these changes. They penalise sole traders, despite them being quantifiably the most productive business type in the country. As our CEO James put it, “It feels like a low blow.”.
Hnry is currently doing some research into retirement outcomes for sole traders alongside the Retirement Commission, and as part of that we’ve flagged the negative impacts of this policy in the hopes there will be a way to offset it.
But until then, you could potentially up your contributions slightly (if you can), to counterbalance the drop in government contributions.
You can also let us know how you feel about the changes – we genuinely do listen, and factor your opinions into our communications with government agencies. It’s part of the reason why we started doing our Sole Trader Pulse in the first place – so we can hear, represent, and amplify the concerns of our community.
About Hnry
In case you’re new here, hi! We’re Hnry, an award-winning tax service designed specifically for sole traders. We stay on top of all things tax, so you don’t even have to think about it.
For just 1% +GST of your self-employed income, capped at $1,500 a year, Hnry will calculate and pay all your taxes, levies and whatnot for you, including:
We also file your tax return every year, all as part of the service. Oh, and we chase-up late paying clients on your behalf. And we manage and claim every expense you raise, so you get all the tax savings you’re entitled to in real time.
Basically, we make it so that you never have to think about tax again.
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