1 April Tax Cuts - What They Really Mean

Today being 1 April will see many employees pick up extra cash in their take home pay packets as a result of the National Government’s tax cuts which take effect today.  This is the second round of tax cuts in the last 12 months, the first introduced by the Labour Government effective 1 October 2009, and the most recent reductions by the National Government.

While on an individual basis, the tax reductions are not in themselves significant, across the whole of New Zealand, they will place additional cash into the take home pays of employees.  For example, an employee earning $48,000 per annum will be $23 a week better off.  For employees earning less than $40,000, there are no changes to tax rates introduced on 1 October 2008 by the Labour Government unless they qualify for the Independent Earner credit.  For an individual who is not receiving a benefit or Working for Families earning $24,000 a year, the Independent Earner credit will equate to an extra $10 a week in take home pay.

While some are quick to point out that those earning $40,000 or less a year are no better off under National’s tax cut package, unless they qualify for the Independent Earner credit, and that is true, it must be remembered that someone earning $40,000 a year did pick up a tax cut equivalent to $16.50 per week in October 2008.  While high income earners also benefited from Labour’s tax changes, these were more targeted at those on low and middle incomes.

The drop in the top personal tax rate from 39% to 38%, on income over $70,000, and the increase in the threshold at which tax is paid at 33% to $70,000 will undoubtedly have a greater impact for high income earners.  For example, someone earning $100,000 under the National 1 April 2009 tax cut package will be $1,260 better off per annum.  If this is combined with Labour’s October tax cuts, they are $2,720 better off than they were this time last year.

There are also other positives out there for employees with interest rates being significantly lower than they were this time last year, and petrol prices also showing some reductions, however probably the biggest impact will be around job security and people feeling confident that they can pay the mortgage and put food on the table.  Irrespective of how large any tax cuts are, these will be of little comfort for employees who find themselves without work because of businesses downsizing or with reduced hours.  Any increase in the minimum wage or extra take home pay because of tax cuts could easily be more than offset by reduced working hours or potential redundancies.

Ultimately, it is consumer confidence which results in increased spending and while the National Government’s tax reductions from 1 April 2009 will put extra money in the take home pay of many New Zealanders, those workers would be wise to feel confident about their job security before they spend the extra income.  At a time when cashflow for individuals and businesses remains tight and confidence is low, there is no guarantee that today’s tax cuts will result in spending that will benefit the economy.

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Last updated: 1st April, 2009 | 9:15 am