The IRD might contact Employees regarding PAYE under-payment, or provide a refund if too much has been paid.
From 2019 onwards the IRD have introduced new systems to automate this process. In many cases, this replaces the need to file individual tax returns, and an increasing number of people will hear from the IRD regarding both over and underpayments.
The IRD use factual data for a complete financial year, while Payroll calculations must use estimated earnings. This article explains where differences might arise.
Background to PAYE calculations
All MYOB payroll software is designed to calculate PAYE exactly as the IRD's specification requires.
“PAYE” deductions might include tax, student loan, and the ACC earner levy. All are calculated using the Employee’s tax code, together with “per financial year” earnings bands and rates:
- The specification requires “per pay period” calculations that reference annual earnings.
- For example, weekly pay with $1,000 of wages or salary has PAYE assessed as if earning $52,000 per year. PAYE is calculated and then pro-rated back to a weekly amount.
- A $3,000 allowance (so lump sum payment) using the IRD’s “Extra Pay” method is assessed using the “last four weeks earnings” to estimate annual earnings.
- Continuing the above example, if each of the last 4 pays held $1,000, annual earnings are taken as 4 x 1000 x 13 = $52,000. The lump sum is taxed at “marginal” (ie highest earnings band) rate for someone earning $55,000 (estimated annual earnings + allowance).
For a complete (1Apr to 31Mar) financial year the IRD calculates PAYE on actual earnings reported to them. This can give a different result to “per pay” figures:
- Where PAYE has been over-paid, the IRD can arrange a refund.
- If underpaid, the IRD sometimes require payment of an additional amount.
- The following sections cover reasons why “per pay” calculations might differ from the "per year" figure.
The IRD might be aware of earnings that are not included in Payroll calculations (and so push employee into a higher earnings band). For example:
- Bank interest, a KiwiSaver account, dividend payments, or other investment income (perhaps with incorrect tax rate applied at source).
- A second job (perhaps using incorrect tax code).
- Payments from earlier employment in the same financial year – perhaps including lump sums for unused leave or redundancy payments.
Pay periods that include additional days or lump sum payments
Including more than one period’s wages, salary, or leave in one pay (perhaps over the summer holiday period) distorts “per pay” calculations. This might lead to the use of a higher earnings band and rate.
Extra Pay allowances use the IRD’s “last four weeks earnings” calculation. Pays in that time with higher or lower than normal earnings (say due to absence) could distort the calculation. These allowances are typically:
- Bonus payments
- Leave types that were “Future Dated” or “Cashed up”
- Termination amounts (for unused annual leave)
Payroll settings that differ from IRD expectations
These situations or settings are likely to result in under or over calculation:
- Tax code incorrect – or perhaps a “Special tax Code” with incorrect figures.
- Allowances with “Override Tax Rate” values that do not match employee’s situation.
- Use of “Override PAYE” in Standard or Current pays (this prevents normal calculation).
For detailed help or advice on specific situations or employees
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