PAYE: How Your Employer Deducts Tax

For most New Zealanders in employment, income tax is collected automatically through Pay As You Earn (PAYE). You never see it — your employer deducts the right amount from each pay and sends it to IRD. But the system relies on you providing the correct tax code, and getting this wrong can lead to an unexpected tax bill or an unnecessary loss of cash during the year. Here’s how PAYE works.

What Is PAYE?

PAYE is the system by which employers withhold income tax (and certain other deductions) from employees’ wages or salaries and pay them directly to IRD on the employee’s behalf.

Each time you’re paid, your employer:

Calculates your gross pay
Applies your tax code to determine the correct income tax to withhold
Deducts ACC Earner’s Levy, KiwiSaver, and student loan repayments (if applicable)
Pays you the net amount
Remits the deductions to IRD (typically twice monthly or monthly, depending on employer size)

At the end of the tax year (31 March), IRD reconciles your total PAYE deductions against your actual tax liability. If you were over-deducted, you get a refund. If under-deducted, you owe the difference.

Tax Codes: What They Mean

Your tax code tells your employer how to calculate your PAYE deductions. You provide your tax code on a Tax code declaration (IR330) form when you start a new job.

Primary Employment Codes

M — Main income source This is the standard code for your primary job. It applies the full progressive tax bracket structure, starting from $0. If this is your only job, “M” is almost certainly the right code.

ME — Main income, eligible for Independent Earner Tax Credit (IETC) Use this code if your income from this job will be between $24,000 and $70,000, and you don’t have another job or receive NZ Super, a student allowance, or Working for Families. The ME code means your employer will apply the $10/week IETC automatically, reducing your weekly tax deduction.

Secondary Employment Codes

If you have more than one job, your secondary employer needs a different code. Secondary income codes don’t apply the lower-bracket rates — they apply a flat rate to avoid you benefiting from lower brackets twice.

Code	Rate	When to Use
S	17.5%	Secondary income where total income is $15,601–$53,500
SH	30%	Secondary income where total income is $53,501–$78,100
ST	33%	Secondary income where total income is $78,101–$180,000
SA	39%	Secondary income where total income is over $180,000

Choose the secondary code based on your expected total income from all sources, not just the secondary job.

Example: You earn $50,000 from your main job and take on weekend work expecting to earn around $8,000 more. Your total income will be ~$58,000. You’d use the SH code (30%) for the secondary job.

Other Tax Codes

NSW — No notification of student loan, no withholding (avoid using this unless instructed by IRD)

CAE — Casual agricultural workers (flat 17.5% rate, no KiwiSaver or student loan obligations)

EDW — Election day workers

WT — Schedular payments (contract work, director fees, honoraria)

Student Loan Codes

Any of the above codes can have “SL” added to indicate you have a student loan:

M SL — Main employment with student loan
S SL — Secondary employment with student loan
ME SL — Main employment, IETC-eligible, with student loan

The SL suffix instructs your employer to also deduct 12% of income above the $24,128 annual threshold toward your student loan.

How to Change Your Tax Code

If you need to change your tax code — for example, you’ve taken on a second job, your income level has changed, or you were using the wrong code — you simply:

Complete a new IR330 form (available from ird.govt.nz or your employer)
Give it to your employer
Your employer updates the code from your next pay period

There’s no fee or penalty for changing tax codes. You can change as often as needed.

If you’re not sure which code to use, IRD’s tax code calculator at ird.govt.nz can guide you through the decision.

Secondary Tax: Is It Fair?

Secondary tax is sometimes criticised as unfair — if you’re earning a low amount from a secondary job, why should it be taxed at 17.5% or 30% rather than 10.5%?

The answer is that your primary job already uses up the low-rate brackets. The progressive structure gives everyone the benefit of the lower brackets on their first $15,600 — through their primary employer. A secondary employer can’t also apply those lower rates, or you’d effectively get double the benefit.

However, the system isn’t perfectly accurate. If your total income turns out to be different from what you estimated when choosing your secondary code, you may have paid too much or too little tax. This gets corrected at year end.

Over-Deduction and Tax Refunds

It’s common for employees to have slightly more PAYE deducted than their actual tax liability, particularly if:

You worked for part of the year only
You changed jobs (especially if both employers applied the lowest brackets independently)
Your income was lower than expected
You used an incorrect secondary tax code

In these cases, IRD’s end-of-year calculation will show a refund. Since 2019, IRD automatically processes these assessments for most employees and pays refunds directly to your bank account — no action required in most cases.

Under-Deduction and Tax Bills

Under-deductions happen when not enough PAYE was withheld:

You used a code that was too low for your income level
You had multiple income sources and the combined deductions were insufficient
You received untaxed income (e.g., interest, rental income, freelance payments)

If you have substantial non-PAYE income, you may need to file an IR3 individual tax return and pay provisional tax during the year.

Under-deducted amounts must be paid by 7 February following the tax year end. IRD will issue an assessment, and penalties may apply if payment is late.

PAYE and KiwiSaver

Your employer also deducts KiwiSaver contributions through the PAYE system. If you’ve chosen a contribution rate of 4%, for example, your employer deducts 4% of your gross pay and sends it to IRD along with the income tax, who then passes it to your KiwiSaver provider.

What Employers Submit to IRD

Employers don’t just send the money — they also file payday filing information with IRD. Since April 2019, employers must electronically file employee earnings and deduction information each pay day (or within 2 days of payday for large employers). This gives IRD real-time visibility of employee earnings and means discrepancies are caught faster.

Summary

PAYE automatically deducts income tax, ACC levy, KiwiSaver, and student loan from wages
Your tax code determines the rate: “M” for primary income, “S/SH/ST/SA” for secondary jobs
Add “SL” to any code if you have a student loan
“ME” applies the IETC credit for income between $24,000 and $70,000
Change your tax code anytime by giving your employer a new IR330 form
Year-end refunds or bills settle any over- or under-deductions
IRD automatically processes most employee assessments and pays refunds

If you’re unsure what your take-home pay will be, use the Take-Home Pay Calculator to model the full effect of your tax code, KiwiSaver rate, and student loan on your net pay.