Self-employed Kiwis Are Selling Themselves Short On Tax

 Analysis of user data by accountancy and tax app Hnry has revealed that less than a quarter of one percent of self-employed Kiwis need to set aside a third of their income for tax, yet thousands are still being advised to do so.

For years, people earning independently - whether self-employed, sole-traders, freelancers or contractors - have been advised by accountants and tax agents to hold back 33 percent of their income to cover income tax, even though having an overall tax rate of that amount is extremely unlikely. In fact, if you earned a whopping $10 million per year, your income tax rate would still only be 32.9 percent, says Hnry CEO James Fuller.

Fuller says self-employed Kiwis could be utilising their own money in a far more beneficial way if that outdated and archaic advice was overlooked.

“When I first became self-employed a few years ago, I was told on good authority to ‘hold on to 33 percent of everything I earned’ to cover income tax, and to put away any GST I collected on top of that. Putting away the additional 15 percent for GST made sense - that’s a flat percentage - but I questioned why I was advised to put away so much for income tax”.

Fuller says it seemed like this was just the established way of doing things and he could only assume that as 33 percent was the top income tax rate in New Zealand at the time, it was based on being safe rather than sorry, or that ACC bills were included. Even so, however, it is still too much to be setting aside based on most people’s actual annual earnings, he says.

“People may think that holding that amount of money might lead to earning interest on it, but given the terrible interest rates, any interest earned is pretty non-existent. Holding on to 33 percent means that self-employed people are missing out on their own money for no good reason - money that could have been used for family days out, holidays, KiwiSaver or purchases for their business,” he said.

“At a time when money is tightest, too many Kiwis are putting away arbitrary amounts of money to cover their taxes, based on misinformation and old-school thinking”.

Fuller says that with a new top rate of tax of 39 percent coming into effect from April 1st this year, it remains to be seen whether people will react by putting even more of their money aside.

“Will we see a surge of people putting 39 percent of their income into their savings accounts, only to see it gain little or no interest in the current economic climate?”

“I wonder what the next wave of inefficient, old-school advice will be. For those wanting more accuracy, any good accountant should be able to provide you with up-to-date estimates of all your tax rates on a regular basis - and if they can’t or won’t, it may be time for an upgrade”.

According to IRD’s income tax calculator, earnings of $1 million per year would currently mean an overall income tax rate of 32.1 percent, $5 million would be 32.8 percent and $10 million would be 32.9 percent. To achieve an income tax rate of 33 percent (rounded up) on the current tax rates, a net income in excess of $20 million per year would be required.

“Perhaps it’s time for self-employed people to challenge some of these antiquated practices, to make sure they’re not just slipping into the trap of setting aside an arbitrary amount, just because that’s always been ‘the done thing,” Fuller said.

About Hnry

Hnry is an all-in-one service that takes care of all the financial admin for contractors, freelancers, sole traders and the self-employed - allowing them to focus on getting the job done, rather than worrying about tax and compliance. Hnry provides a cutting edge, automated, pay-as-you-go service, handling invoicing, expenses, payments, taxes and filings, charging just 1% of the self-employed income, with a cap.

As Australasia's fastest-growing accountant and tax agency, Hnry helps thousands of individuals to focus on doing what they do best, without having to worry about the burden of financial admin. Hnry also works closely with recruitment agencies and labour hire organisations, providing a value-add to keep their contractors compliant, whilst also removing the risk of the agency providing tax advice to contractors.

Hnry was a finalist for 'Hi-Tech Service of the Year' at the 2019 New Zealand Hi-Tech Awards, won 'Emerging Service of the Year' at the 2019 Wellington Gold Awards and 'Supporting Gold' at the 2020 Wellington Gold Awards.

Hnry’s mission is to give freelancers, contractors and self-employed their freedom back, by being their trusted financial sidekick - enabling them to get back to doing what they love.

You can find out more at https://hnry.co.

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