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The sole trader’s guide to secondary tax

How to navigate the tax nuances of multiple income streams.

Ever scratched your head, wondering why you’re paying different amounts of tax on your main PAYE job and your part-time gig? And if you run a side hustle do you need to pay more tax on that as well?

Welcome to the world of secondary tax. We know it can be a bit confusing, so we’re here to break it down for you.

Sole traders

What is “secondary tax”?

Secondary tax is the income tax you pay on a second salary. So if you have a main job where your employer deducts PAYE tax, and you take a second PAYE job, you’ll pay secondary tax rates on that second job (and any third, fourth or more PAYE jobs).

Secondary tax is usually levied at a higher rate, which is why it feels like you’re paying more tax than normal. But that’s actually not the case. Very basically, a secondary tax rate is higher than a primary income tax rate to take into account income you’ve already earned.

For example, if you’re self-employed for the first six months of the year and earn $60k, then take a PAYE role for the second half and earn another $60k, your PAYE withholding tax will nowhere near cover your final tax bill. That’s because your PAYE job doesn’t take into account what you’ve already earned, so you’ll only be taxed to cover that second $60k.

In this instance, it may actually work out better for you to use a secondary tax code – you’ll be taxed more in the short run, but you may not end up with such a big tax bill come the end of the financial year.

The same principle applies if you get a big pay raise, or move to a higher-paying PAYE role midyear. Secondary tax codes are your friend here!

How is secondary tax calculated?

New Zealand uses a progressive tax system, meaning lower earners pay less tax and higher earners pay more tax.

The amount of tax you pay is based on all your income sources at the end of the financial year.

If your primary income is from a PAYE salaried job, you’ll be assigned a tax code depending on your situation, and the rate of tax you pay will be calculated based on how much you earn and which tax bracket you fall into.

For each dollar of income Tax rate
Up to $14,000 10.5%
Over $14,000 and up to $48,000 17.5%
Over $48,000 and up to $70,000 30%
Over $70,000 and up to $180,000 33%
Remaining income over $180,000 39%

But not every dollar you earn gets the same tax treatment.

If you earn $50,000 a year, for example, you fall into the 30% tax bracket but you don’t pay 30% on the whole $50,000.

Because of the progressive tax rate system, you pay 10.5% on the first $14,000 you earn, 17.5% on the next $34,000, and 30% on the remaining $2,000 so the average tax rate in this case ends up being 16%.

📖 For more info on progressive tax rates and how they work, check out our guide to tax rates for sole traders.

📖 As a sole trader, you can claim tax deductions on eligible expenses needed to run your business. This can help bring your taxable income down. Check out our sole trader guide to expenses.

Secondary tax rates have different codes and they’re also calculated on how much you earn at the end of the financial year. But – plot twist: the secondary rate comes out higher. Wait, what?

Estimated annual total income from all sources Secondary tax code for the second source of income Secondary tax rate (before ACC levies)
$14,000 or less SB 10.5%
Between $14,001 and $48,000 S 17.5%
Between $48,001 and $70,000 SH 30%
Between $70,001 and $180,000 ST 33%
Over $180,000 SA 39%

So you might wonder…

Am I being taxed more on my second job?

Because the secondary income from your second PAYE gig is taxed at the highest rate you’re eligible for, you might feel like you’re being taxed more than you need to be. But don’t worry, you’re not!

If your main PAYE job rakes in $60,000 and your second PAYE gig brings in another $12,000, you may be tempted to use the SB secondary tax code to pay 10.5% on the second PAYE job. But you actually need to set it to the ST code and pay 33% secondary tax because your total income is $72,000 ($60,000 from your main PAYE job, and $12,000 from your second PAYE gig), putting you in the 33% tax bracket. Make sense?

To get even more mathsy about it, what you need to pay attention to is your effective tax rate. This is the average rate of tax you pay across your whole income. Due to our progressive tax system, the effective tax rate for an income of $72k is 20.39%. If you use the SB secondary tax code for your secondary income in the above example, you’ll be paying tax at an effective tax rate of 17.05% – far lower than what you need it to be!

When you do your tax return, the IRD combines all your earnings and works out the tax based on the total. If you only pay the 10.5% secondary rate, you’ll likely get a nasty tax bill at the end of the financial year. Ouch!

So while it may feel like you’re being penalised for taking on a second job, you’re actually still probably paying the right amount of tax for your income level. And if you do accidentally overpay, you’ll get a refund at the end of the financial year. Yay!

No penalties, just maths. Whew!

Secondary tax confusion

Do sole traders pay secondary tax?

If your sole trader business is your only source of income, you just need to make sure you’re paying the right amount of tax overall at the end of the financial year. Secondary tax doesn’t play a role here.

But what about if you’ve got a main PAYE job and you start a self-employed side-hustle offering yoga classes for seniors at your local community centre?

In this case the fact you’ve started your own business won’t put you on the secondary tax code, because as we noted earlier, secondary tax only applies to PAYE sources of income, not self-employment.

But here’s a kicker: If your side hustle takes off (senior yogis for the win!) and becomes your main income source, and you’re still working at your PAYE salaried job, you’ll need to set aside more tax for your self-employed income than before – essentially at a secondary tax rate.

Remember though, as a sole trader, you can claim tax deductions on eligible expenses needed to run your business. This can help bring your taxable income down.

💡Note: If you’re a contractor and receive payments from your clients or employer with tax already deducted, these are not classed as PAYE deductions. They’re known as withholding tax (WT). And again, because secondary tax codes only apply to your PAYE salaried income and not to all sources of secondary income, you don’t use secondary tax rates here.

So, if you have a primary PAYE job, or if you’re a contractor on withholding tax, it’s up to you to figure out how much additional tax you might owe, and save up for it. If you’re really stuck, there’s nothing stopping you from using the relevant secondary tax rate as a guide.

And while we’re here, you also have to calculate and pay ACC levies,GST (if applicable), andKiwiSaver contributions (optional) for all your self-employed income. You can use the calculators on themyIR website to do this.

Or you can just use Hnry to do your taxes

But really, just use Hnry

Let’s be real. Juggling taxes from various gigs can feel like trying to solve a jigsaw puzzle with pieces from three different boxes.

But you can breathe easy. Hnry’s here to ensure you’re paying just the right amount on all those jobs and side hustles. An award-winning accounting app for sole traders, we work out everything from your tax-free threshold to what tax deductions you can claim and everything in between.

For just 1% + GST of your self-employed income, capped at $1,500+GST a year, Hnry will calculate and pay all your taxes, levies and whatnot for you, including:

Easy! Basically, we make it so you never have to think about tax again. Join Hnry today.

DISCLAIMER: The information on our website is for general educational purposes only. It doesn't cover all situations and circumstances, and shouldn't be taken as direct tax advice. If you're looking for specific help with your taxes, join Hnry and our team of experts can provide you with assistance tailored to your business needs.

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