Tax is boring. Honestly, most of us would rather watch paint dry than read an IRD manual. But then you get a pay rise, and suddenly everyone in the staff room is an expert, telling you that "earning more will actually make you poorer" because you'll "jump into a higher bracket."
It sounds scary. It also happens to be completely wrong.
Understanding marginal tax rates nz is basically the difference between making smart financial moves and making decisions based on urban legends. If you live in Aotearoa, your income isn't taxed at one flat rate. It’s a ladder. You pay a little bit on the bottom rung, a bit more on the next, and only the very top of your earnings gets hit with the big numbers.
The "Tax Bracket Myth" that Needs to Die
You've heard it. "I turned down the promotion because the extra $5,000 puts me in the 33% bracket and I'll take home less than I do now."
That is not how it works. At all.
New Zealand uses a progressive tax system. Think of your income like a series of buckets. The first bucket holds your first $15,600. No matter how much you earn in total—whether it's $20k or $200k—that first $15,600 is only ever taxed at 10.5%. Once that bucket is full, the next dollar you earn goes into the second bucket.
Why you always take home more
Even if you earn $1,000,000, you are still paying 10.5% on that very first chunk of change. Crossing a threshold only changes the tax rate for the additional dollars you earn. You never, ever lose money by moving into a higher marginal tax rate.
Current Marginal Tax Rates NZ (2025/2026)
The landscape shifted recently. Following the changes that kicked in during late 2024, the thresholds have stretched out a bit. Here is what the "buckets" look like for the current 2025-2026 tax year.
Up to $15,600, you pay 10.5%.
From $15,601 to $53,500, the rate is 17.5%. This is where a huge portion of Kiwi workers sit for the bulk of their pay.
From $53,501 to $78,100, it jumps to 30%. This is a significant step up, often felt by mid-career professionals or those picking up extra shifts.
From $78,101 to $180,000, you’re looking at 33%.
And for the high earners, anything over $180,000 is taxed at 39%.
It's a steep climb at the top. But remember, a person earning $181,000 only pays that 39% rate on exactly one thousand dollars. The rest of their income is distributed across the lower, cheaper brackets.
The "Effective" Rate vs. The "Marginal" Rate
Your marginal tax rate is the tax on the very last dollar you earned. If you earn $60,000, your marginal rate is 30%. But your effective tax rate—the actual percentage of your total pay that goes to the IRD—will be much lower.
For someone on $60,000, the effective rate is usually somewhere around 16% or 17%. That sounds a lot better than 30%, doesn't it?
Secondary Tax: The Great Kiwi Boogeyman
If you have a second job, you've probably seen a "secondary tax" code like SB or SH. Many people think secondary tax is a "penalty" for working too hard.
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"The government takes half my second pay check!"
Actually, they don't. Secondary tax is just a way to make sure your total income is taxed correctly across both jobs. Because your second employer doesn't know about the "low tax buckets" your first employer already filled up, they have to start taxing you at your highest marginal rate immediately.
If they didn't do this, you'd end up with a massive tax bill at the end of the year. It's essentially a "pay now or pay later" situation. If you overpay, the IRD usually squares it up and sends you a refund in May or June.
The Hidden Costs: ACC and Student Loans
When looking at marginal tax rates nz, we often forget the "stealth taxes."
- ACC Earners' Levy: This is roughly 1.60% (it fluctuates slightly year to year). It’s capped at a certain income level, but for most people, it's an extra slice off the top.
- Student Loans: If you’re over the repayment threshold (around $24,128 for the 2025/26 year), you lose another 12% of every dollar.
Suddenly, a "30% bracket" starts to look like a 43.6% deduction from your take-home pay. This is what economists call the "Effective Marginal Tax Rate." For people receiving Working for Families tax credits, this can get even crazier. As you earn more, your credits "abate" (decrease), meaning for every extra dollar you earn, you might only keep 20 or 30 cents.
Moving from Sole Trader to Company: Is it Worth It?
A common myth in the business world is that forming a company will magically slash your tax to the flat corporate rate of 28%.
Kinda. Sorta. But not really.
Yes, a company pays 28%. But the money is "trapped" in the company. To get it into your personal bank account to buy groceries or pay a mortgage, you have to pay yourself a salary (which is taxed at your personal marginal rates) or a dividend.
Dividends come with "imputation credits." These credits represent the 28% the company already paid. If your personal marginal rate is 33% or 39%, you still have to pay the "top-up" difference to the IRD. There is no free lunch.
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PIE Investments: The Legal "Loophole"
One area where marginal rates can be bypassed is through Portfolio Investment Entities (PIEs). PIEs, like most KiwiSaver funds, have a maximum tax rate (PIR) of 28%.
If you earn $200,000, your marginal rate is 39%.
If you put your savings in a standard bank term deposit, your interest is taxed at 39%.
If you put that same money in a PIE fund, the tax is capped at 28%.
That’s an 11% saving just for changing the "wrapper" of your investment. It’s one of the few places where the NZ tax system actually gives high earners a break.
Actionable Steps for Your Tax Planning
Knowing your rate is power. Don't just look at the gross number on your contract.
First, identify your current bracket. Look at your total expected income for the year, including bonuses and side hustles. If you are hovering right on the edge of the $78,100 or $180,000 thresholds, small changes can matter.
Second, check your tax codes. If you have multiple income sources, ensure you aren't using the "M" code for both. That is a fast track to a debt with the IRD.
Third, consider PIE structures for your savings. If your income is over $53,500, a PIE fund or a PIE term deposit is almost always more tax-efficient than a standard savings account because of how it interacts with your marginal tax rates nz.
Finally, keep a record of your work-related expenses if you're a sole trader. Every dollar you "deduct" is a dollar taken off your highest tax bracket. If you're in the 39% bracket, a $100 deduction saves you $39. If you're in the 10.5% bracket, it only saves you $10.50. High earners get the most "value" out of legitimate business expenses.
Tax isn't about avoiding your contribution to schools and hospitals. It's about not paying more than you legally owe because of a misunderstanding of the rules.