Some low-income families could end up facing a 128% tax rate

The design of the Working for Families program could leave low-income families shouldering higher taxes. File photo.
photo: Royal Bank of New Zealand

Some low-income families could face effective marginal tax rates of more than 100 per cent in 2027 unless things change, a tax expert has warned.

It is possible that the high rates are due to the design of the Working for Families program.

The plan includes a minimum family tax credit for families earning below a specified income threshold, which is adjusted annually.

Currently, households with after-tax incomes of up to $35,204 can receive the credit, and after-tax household incomes must be at least $677 per week.

It’s designed to give people more benefits than they otherwise would. The more you earn, the less you’ll get. The credit is deductible at 82.5%.

Terry Belle.
photo: supply

But tax expert Terry Baucher points out that the budget’s regulatory impact statement shows that at current growth rates, the threshold will overlap with the $42,700 annual pre-tax household income threshold on April 1, 2027, at which point all Working for Families benefits will be rebated at a rate of 27 per cent. The threshold will not adjust automatically.

When the minimum family credit threshold is raised to $43,000, a single parent working 25 hours a week and earning $42,700 will face an effective marginal tax rate of 128.6%.

Individuals pay 17.5% income tax, 82.5% minimum family tax offset, 1.6% ACC levy and 27% working family relief.

“That happens for every $42,700 over that. If someone is paying off student loans and is receiving a housing subsidy, those reductions will also kick in,” Boucher said.

Boucher said many people would be surprised at the actual tax rate imposed on those who lose support from systems such as Working from Home.

Although the government has increased the in-work tax credit component of the Working From Home scheme to $25 a week, the threshold and rate of credit mean most people will receive less than $17 on average.

“They’ve lost a third of their tax revenue from emissions reductions, but the government is saying ‘yes, you can get $25 a week’.”

He said people earning less than $48,000 and receiving the Working From Home payment were being taxed at a higher effective rate than the prime minister or finance minister.

“That’s a key point because you hear a lot of people say ‘people need to take a break and work’ but that’s not the case. It’s not that simple. If you have a tax cut then it goes against you if you do extra work, not to mention if you have extra expenses like transport and childcare.”