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Tax rates for sole traders

What is tax and how do the tax brackets work?

Whether you work for an employer (PAYE) or work for yourself as a contractor, freelancer, or self-employed tradie, taxes are unfortunately a fact of life. As much as we would all like to find ways to avoid paying tax, we’re sorry to confirm that if you’re earning an income, you’re obliged to pay the tax man. Ouch.

While figuring out what you owe the IRD can be complicated, the good news is that we’re here to help. In this article, we’ll explain:

  • What tax is
  • How tax brackets and rates work
  • How much tax you’ll need to pay annually as a sole trader

Let’s get stuck in!

What is tax?

Tax is money collected from all workers and businesses, and from the purchase of some goods and services, by the Inland Revenue Department (IRD). This money is then used to fund public goods like schools, public hospitals, drinking water, roads and bridges, and Shortland Street. Basically, everything a country needs in order to keep running.

As a sole trader, you own, operate, and manage your own business. Unfortunately, unlike a salaried/PAYE employee, this means that you also own, operate, and manage your own taxes.

For most people, this can be a bit of a headache - tax and financial admin is often costly and time-consuming, even when you know what you’re doing. That’s why a lot of sole traders use tax platforms like Hnry, which manages all of your tax obligations for you without the added cost of hiring an accountant or needing to download additional accounting software.

According to research, Hnry saves sole traders an average of 3 hours a week and $214 a month. See how Hnry works.
 

Tax types and payments:

Throughout the year, there are a few different types of taxes and tax payments that you need to be on top of to avoid ending up with an unexpected tax bill.

Income tax

Income tax is calculated based on your earnings. It doesn’t matter if you’re a salaried employee or a sole trader - you must pay income tax on any dollar you earn.

The amount you pay however depends on which tax bracket you fall into. A tax bracket is a structured set of income bands, with higher tax rates payable the more you earn. These tax rates are the same for PAYE employees and sole traders:
 

Income Tax Rates (From 1 April 2021)

Income BracketTax Rate %
0 to $14,00010.5%
$14,001 to $48,00017.5%
$48,001 to $70,00030%
$70,001 to $180,00033%
$180,001 and over39%

Source: IRD
 

It’s a common misconception that you’re taxed at the highest rate possible across your entire salary. For example, if you earn $50,000 a year, you may think you need to set aside 30% for tax, eg. $15,000. But in New Zealand, we have a progressive tax rate, meaning that you’d pay 10.5% on the first $14k you earn, 17.5% on your earnings from $14,001 to $48,000, and 30% on anything over $48,001 (and under $70k):

Bracket 1: 10.5% of $14,000 = $1,470
Bracket 2: 17.5% of $34,000 = $5950
Bracket 3: 30% of $2,000 = $600
Total income tax bill: $8,020

This makes your effective tax rate 16.04% of 50k - far less than paying 30% across the board!
 

ACC Levies

An ACC levy is also collected from your income to cover physical (and some mental!) injuries that happen while you’re busy being alive. For sole traders and contractors, you’ll pay three different types of levies on your liable income:

  • the Earner’s levy, a flat rate of $1.21 per $100 of your liable income
  • the Working Safer levy, a flat rate of $0.08 per $100 of your liable income
  • the Work levy, which is based on what kind of business you run. The riskier your line of work, the higher this levy will be.

Note: the term “liable income” refers to income that is subject to the ACC levies. ACC sets a minimum and maximum threshold for liable income every financial year, and you’re only required to pay levies on your earnings between these thresholds. You can read more about these thresholds on the ACC website.

ACC levies are paid in addition to your income tax. You can learn more about the different types of ACC levies on their website, or check out our article on understanding your ACC invoice.
 

GST

GST, short for “Goods and Services Tax”, is a 15% flat-rate tax levied on most goods, services, and other items sold or consumed in New Zealand. If your taxable income is more than $60,000, you’ll need to register for GST.

Registering for GST essentially means that you will be collecting this tax from your customers on behalf of the IRD. You’ll need to charge your clients 15% GST on top of your regular fees, which must then be filed and paid to the IRD on the 28th day of almost every month. You can reduce your GST bill by claiming back the GST you’ve paid for business-related purchases. For more information, check out our complete guide to GST.

Hnry makes GST invoicing quick and easy. Join now and send your first invoice today!
 

Student Loans

If you still have student loan debt, and your income exceeds the minimum repayment threshold of $20,280, you’ll need to make payments to the IRD. These payments are set at 12% of every dollar you earn past the minimum repayment threshold.
 

Reducing your income tax

You can reduce your taxable income - and therefore your income tax payment - by claiming tax deductions for approved business expenses.

Claimable expenses can include tools and equipment, uniforms, administration expenses, home office expenses, and car-related expenses for business vehicles.

Bear in mind that the IRD has strict rules around what you can and can’t claim as a business expense. As always, if you’re unsure, check with a tax specialist (or if you’re a Hnry customer, our expert team of accountants will review your expenses immediately to get you instant tax relief - giving you the confidence that what you’ve raised is correct).
 

Filing a Tax Return

Your income tax return (a form declaring any earnings above $200 that the IRD isn’t aware of eg. self-employed income) is due on the 7th of July each year, unless you have an extension. If you have an accountant or tax agent like Hnry managing your taxes, they can file it for you, or request an extension on your behalf. You can file your annual tax return online or by downloading the form from the IRD website.
 

How Hnry Helps

Hnry is a registered tax agent that can take the pain out of managing your taxes. We automatically calculate, deduct and pay all of your taxes with every invoice you’re paid, so you aren’t caught out with a massive tax bill come tax time, and we’ll even file your annual tax return for you all as part of the service.

Better still, using the Hnry platform costs less than using a traditional accountant, and is entirely tax deductible.

If that sounds good to you, join Hnry today and never think about tax again!


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