Relevance within KiwiSaver
- Details
- Last Updated: Wednesday, 26 February 2025 14:37
NZ KiwiSaver
This is a voluntary superannuation scheme introduced by the Labour Government in 2007.
Initially to encourage people to join, the government provided a tax exemption threshold for each employee, plus a $1000 start-up gift. They also offset the employers contribution with tax refunds for the employer when the scheme started as they were voluntary. Over time, when Employer contributions became compulsory, ESCT was introduced along with removal of the exemption threshold.
For early adopters a salary sacrifice was very rewarding as marginal tax rates were high, and up to the exemption threshold level, the sacrificed amount went tax free to the employees KiwiSaver fund. For high income earners it meant up to a 60 cents in the dollar government gift and was very popular. Once the number of employees who joined the scheme reached about half a million, the new National Government decided the gift was too great and began moving the goal posts.
After 2010 the Tax differences became minimal, except for very high earners mostly those in the 100,000 plus group. For very low income workers, their own marginal rate is less than the employer contribution ESCT rate and a sacrifice no longer makes sense. Most employee are now better off to just increase their own contributions, however, with fiscal drag middle incomer earners may still benefit a little and worth checking.
While simple in concept, the detail is rather more complicated and determining the overall difference is not easy, other than to make changes to the payroll system using the full calculations and to observe the difference. There are also side effects from taking the salary cut, in that while reducing tax, it also reduces the employees own contributions unless they are based on the un-sacrificed salary.