KiwiSaver Tax Credits for Employers

Most employers should be viewing the compulsory employer KiwiSaver contribution as an opportunity rather than a threat.

From 1 April, 2008, all employees over the age of 18 who are enrolled in KiwiSaver must be paid 1% of their gross pay by their employer into their KiwiSaver account. The percentage will increase by 1% each year until the employer is contributing 4%.

However, employers are eligible for a tax credit of up to $1,040 a year to help towards the cost of making their contribution.

It follows that in the first year, the net cost to employers of this contribution is zero for any employee earning $104,000 or less.

That’s because the employer contribution of 1% of pay will be $1,040 or less and this will be entirely offset by the tax credit of up to $1,040, which will match the employer contribution up to that amount.

The tax credits are obtained by deducting the amount of the credit from the amount of PAYE you need to pay each fortnight or month.

Next year, when the employer contribution increases to 2%, there will still be zero net cost to employers for employees earning $52,000 or less (this is well above the average wage).

Good employers who are genuinely interested in the welfare of their employees should be actively encouraging them to join KiwiSaver.

I have come across a number of people employed in small businesses operating on small margins who have been reluctant to join KiwiSaver because of the burden that this would impose on their employer. Hopefully such people can see that, at least for the first two years, there should be minimal or no impact on their employer.

For self-employed people, there are tax savings of up to several thousand dollars a year to be had by becoming a PAYE paying employee of your own company.

As an employee of your company enrolled in KiwiSaver, you will contribute 4% of your salary to KiwiSaver.

You will receive the initial kick start of $1,000 and an employee tax credit of up to $1,040 a year which is matched against your contributions.

As an employer, your contributions of up to 4% of pay to KiwiSaver are exempt from withholding tax. You will also receive the employer tax credit of up to $1,040 a year. Becoming a PAYE paying employee is something that you should discuss with your accountant, as there are a number of other considerations to be weighed up before you decide whether this is the best arrangement for you.

Employers with staff who are struggling to be able to contribute 4% of their pay to KiwiSaver can help such employees for minimal cost.

Under the transition arrangements that are in place, employers can agree to contribute 2% to match a 2% contribution from employees.

The employer tax credit will help to minimise the cost of this to the employer, especially for employees on low incomes. Contributions from the employer and employee will increase over time under the transition arrangements until both are contributing 4%.

So there you have it.

There are a number of reasons why KiwiSaver makes good sense for good employers, so encourage those employees who haven’t yet enrolled to take another look at it.