What is income tax? Definition and FAQs

Published Monday 13 October 2025

Table of contents

• Income tax definition
• Types of income tax
• Income tax rates in New Zealand
• How to calculate income tax
• When you need to file a tax return
• What information businesses need to calculate income tax
• Managing your income tax with Xero
• FAQs on income tax

Key takeaways

• New Zealand uses a progressive tax system where individuals pay different rates on income brackets (10.5% to 39%), while companies pay a flat 28% rate on all taxable profits.

• File an income tax return if you are a sole trader, contractor, or have income beyond salary/wages, with returns due by 7 July after the 31 March financial year end.

• Calculate your tax liability by applying the appropriate rates to each income bracket for individuals, or multiply your net profit by 28% for companies.

• Maintain organised financial records including receipts, income statements, and depreciation calculations, as you must keep receipts for seven years even if not required for submission.

Income tax definition

Income tax is a government levy on the earnings of individuals and businesses. In New Zealand, only the national government collects income tax. There are no state or local income taxes. The collected money funds public services and infrastructure.

Here’s how income tax works:

• Submit your return declaring your taxable income
• Pay on time to avoid fines or penalties
• Check when you need to pay, as timing depends on your business structure and income

Types of income tax

Three main types of income tax apply in New Zealand, depending on your business structure and income sources.

Personal income tax

Individuals pay taxes on their personal income. These taxes increase as your income goes up.

Business income tax for sole traders and partnerships

You combine your business profits or losses with your other income and report them on your personal tax return. You pay personal income tax on the total amount.

Partnerships usually file a separate business tax return. The tax office checks this against each partner’s personal return.

Business income tax for companies

Companies pay taxes on their net profits. These taxes are at a flat rate – currently, the corporate income tax rate is 28% – so the same tax rate applies no matter the profit. If you receive dividends or a salary from your company, you pay personal income tax on that income.

Income tax rates in New Zealand

Review these key income tax rates for New Zealand small businesses.

Current tax rates for individuals

In New Zealand, you pay more tax as your income increases. Your income is split into brackets, and each part is taxed at a different rate.

Current tax rates for businesses

If you run a company, you pay a flat percentage of your profit as tax. If you are a sole trader or in a partnership, your business profit is part of your personal income and is taxed at individual rates.

Current income tax rates in New Zealand range from 10.5% to 39% for individuals and 28% for companies. Tax rates change from time to time, so always check official sources:

• Individual rates:Individual income tax rates, IRD
• Company rates:Company tax rate, IRD

How to calculate income tax

Income tax calculation uses this basic formula:

Income tax = Taxable income × Tax rate

For individual income tax, you pay different rates on different parts of your income. For company tax, you pay the same rate on all your taxable income.

Example: Flat rate income tax calculation

If your company has revenue of $240,000 and expenses of $140,000, you pay tax at a flat rate.

Taxable income (revenue – expenses) x Tax rate

($240,000 – $140,000) x Tax rate

= $100,000 x Tax rate

If your company pays you after-tax profits, you need to declare that income on your personal tax return.

Example: Progressive income tax calculation

If you earn $70,000 in wages and make $30,000 in profits from your sole trader business, your total income of $100,000 falls into several tax brackets.

You would pay:

• 10.5% on the first $14,000
• 17.5% on income from $14,001 to $48,000
• 30% on income from $48,001 to $70,000
• 33% on the final $30,000 (from $70,001 to $100,000)

Common income tax calculations

If you earn $70,000, you pay tax at different rates for each part of your income.

• The first $14,000 is taxed at 10.5% = $1,470
• The next portion (from $14,001 to $48,000) is taxed at 17.5% = $5,950
• The final portion (from $48,001 to $70,000) is taxed at 30% = $6,600

Your total tax would be the sum of these amounts: $1,470 + $5,950 + $6,600 = $14,020.

When you need to file a tax return

For most people, if your only income is from salary or wages, your employer handles this for you through Pay As You Earn (PAYE).

You need to file an income tax return if you are a small business owner, sole trader, contractor, or have other income such as from rental properties. You usually file your return once a year, after the financial year ends on 31 March. The deadline is 7 July, but tax agents may have more time.

What information businesses need to calculate income tax

Essential information for calculating business income tax:

• Financial statements: Revenue and expenses from your income statement (P&L)
• Asset depreciation: Depreciation claims for business-owned assets
• Tax credits: Available credits that reduce your final tax bill

Managing your income tax becomes simpler with the right tools and support:

Automated tax preparation:

• Capture transaction data and store digital receipts (you must keep receipts for seven years, even if you do not need to submit them with your return)
• Automate depreciation calculations
• Generate financial reports for tax filing

Managing your income tax with Xero

Staying organised is the best way to make income tax less stressful. With all your financial information in one place, you can see your earnings, track expenses, and get a clear picture of your tax obligations in real time. Xero simplifies bookkeeping so you can run your business, not your books. Make tax time easier with Xero. Try Xero for free.

FAQs on income tax

Here are some common questions and answers about income tax for your small business.

How much tax do I pay on $70,000 in NZ?

On an income of $70,000, you’ll pay tax in brackets. The total tax would be approximately $14,020 for the year, leaving you with a net pay of about $55,980. Your average tax rate is around 20%.

Who pays the 39% tax rate in New Zealand?

The 39% tax rate applies to personal income earned over $180,000 per year. Only the portion of your income above this threshold is taxed at this top rate.

What’s the difference between PAYE and income tax?

Income tax is the total tax you owe on all your earnings. Pay As You Earn (PAYE) is the method employers use to deduct income tax from your salary or wages as you earn it. For many employees, PAYE covers their entire income tax obligation.

When do I need to pay provisional tax?

You generally need to pay provisional tax if you had more than $5,000 tax to pay in your last tax return. This threshold was increased from $2,500 in response to COVID-19.