Tag Archives: tax credit

May200919

Liz Koh

0

KiwiSaver Update

There are important changes ahead for KiwiSaver members. From 1 April, employers will be required to increase their contribution to 2% of pay, but it won’t increase to 4% as planned by the previous government.

Members will also be able to decrease their contribution from 4% to 2% by informing their employer in writing. The fee subsidy of $40 per year will disappear and employers will lose the tax credit on their contributions.

From a KiwiSaver member’s point of view, the best thing about KiwiSaver is the tax free benefits you get by way of the Government tax credit of up to $1,040 per year and the employer contribution, which is additional to your pay.

These benefits make joining KiwiSaver a logical choice for most people. From 1 April, you will have the choice of contributing 2%, 4% or 8% of your pay.

The best plan, especially when you have still debts to pay off such as a mortgage or credit card, is to contribute whatever you need in order to get the full amount of the Government tax credit.

The tax credit matches your contributions up to a maximum of $1,040 so if you are earning less than $52,000 gross per year you will need to put in 4% of your pay to get the full tax credit and if you are earning less than $26,000 gross per year you will need to put in 8% of your pay to get the full tax credit.

The new contribution rate of 2% is great news for high income earners. For example, someone who earns $150,000 gross per year would previously have had to contribute 4% or $6,000 per year to get the tax credit of $1,040 and an employer contribution of $1,500 (rising to $3,000 on 1 April). By lowering the contribution to 2% that person will now get the same level of benefit for a contribution of only $3,000.

There are some employers who choose to contribute more to members’ schemes than what they are legally required to do. Sometimes this is a matched contribution and sometimes it is a set percentage regardless of your contribution level. If you belong to such a scheme where your contribution is matched, then you should consider contributing up to the level to which your employer will match your contributions; otherwise contribute up to the level where you get the maximum Government tax credit.

Dropping your KiwiSaver contribution down to 2% may mean that you are no longer saving enough for your retirement goals. If you still have debts such as a mortgage or credit card debt, then your focus should be on using any surplus cash to reduce that debt. If you have no debts, consider supplementing your KiwiSaver retirement saving with saving into a diversified Portfolio Investment Entity (PIE).

The advantage of doing this is that your retirement funds in the PIE will be accessible should you need them before you retire. Many KiwiSavers have been enrolled by their employer into a default KiwiSaver scheme. If you are in a default scheme, contact your provider to find out more about what your investment options are, because it is likely that your money is being invested in a conservative fund which may not be appropriate for your retirement needs.

Remember that if you are self employed, you can still join KiwiSaver by enrolling directly with a provider and you will receive the Government tax credit. To get the full tax credit, you will need to contribute at least $1,040 per year. If in doubt, get advice on which KiwiSaver scheme to use and what your contributions should be.

[Post to Twitter]   [Post to Plurk]   [Post to Yahoo Buzz]   [Post to Delicious]   [Post to Digg]   [Post to Facebook]   [Post to Ping.fm]   [Post to Reddit]   [Post to StumbleUpon]  

May200919

Liz Koh

0

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.

[Post to Twitter]   [Post to Plurk]   [Post to Yahoo Buzz]   [Post to Delicious]   [Post to Digg]   [Post to Facebook]   [Post to Ping.fm]   [Post to Reddit]   [Post to StumbleUpon]