KiwiSaver and Tax — PIR, ESCT and What You Actually Pay

KiwiSaver and Tax — PIR, ESCT and What You Actually Pay

KiwiSaver is taxed at both ends, and most members could not name either rate. Money going in is taxed before the fund receives it, and the money the fund earns is taxed as it is earned. Two separate rates, two separate rules, and neither one appears on a payslip in a way that invites a second look.

That matters more than the paperwork suggests. One rate is set by your employer from your salary, one is set by you and supplied to your provider, and a wrong figure in either place quietly changes what you keep for the rest of your working life.

This guide separates the two taxes, explains where each rate comes from, and sets out what a member should actually check.

How We Researched This Guide

The ESCT bands and the PIR rules here come from Inland Revenue's own published material — its prescribed investor rate page, its pages on multi-rate portfolio investment entities, and its guidance on PIE income for New Zealand residents.

The two taxes are often described as a single KiwiSaver tax, which is the source of most of the confusion. They are collected at different points, from different sources, and are processed using entirely different information about you. Treating them as a single rate is what leads members to check one and assume the other is fine.

The Quick Summary (60-Second Version)

Here is the whole picture in six lines.

• The employer's contribution is taxed as it enters the scheme, using the employer superannuation contribution tax.
• ESCT is calculated based on your salary band, and the rate rises as the band does.
• The investment return inside the fund is taxed at your PIR, because a KiwiSaver scheme is a multi-rate PIE.
• Your own contributions come from pay that has already been taxed, so they are not taxed again.
• If you never supply a PIR, the default rate of 28% is applied to the investment return.
• KiwiSaver PIE income does not affect Working for Families or student loan entitlements.

Two Taxes, and They Are Not the Same Tax

The first tax is on money going in. The second is on money the fund earns once it is there. They are collected at different stages of the same account, which is why it is entirely possible to have one right and the other wrong without noticing anything unusual in your balance.

The entry tax applies only to the employer's contribution. The fund-side tax applies to the investment return, every year for as long as the money is invested — which is why the member's own rate is worth getting right early.

Why the entry tax exists at all

An employer contribution is a form of remuneration, so it is taxed like one. Employer superannuation contribution tax is the mechanism, and it is deducted by the employer before the contribution is paid to the scheme.

At the Entry Point: ESCT on the Employer's Contribution

Employer superannuation contribution tax is applied to the contribution your employer makes on your behalf. In practice, the employer calculates the amount, withholds the tax, and pays the balance into your scheme along with the ESCT, which is passed on to Inland Revenue.

Where the ESCT rate comes from

The rate is not chosen by you or your employer. It is derived from your salary or wage band and increases as that band rises.

Because the band is set based on your salary, a pay rise can change the rate applied to your employer's contribution without any decision being made about KiwiSaver at all. That is worth knowing, because it means the tax on this part of your savings changes as a side effect of your pay rather than as a result of anything you chose.

The contribution and the tax both go to the scheme

A detail that catches people out is that the employer contribution and the ESCT are both paid to the scheme. The tax portion is then passed on to Inland Revenue. It is not withheld somewhere else and never seen — it travels through the scheme on its way to the revenue.

The money you contribute yourself

Your own contributions are different, and the difference is simple. They are deducted from pay that has already been taxed, so the employee contribution itself is not taxed again. The default employee contribution rate is 3.5%, deducted from net pay.

That is why the two halves of a KiwiSaver account do not feel symmetrical. An employer's contribution arrives with tax already taken out, while your own dollars arrive whole because tax was taken from your wages before the contribution was calculated.

At the Fund End: Your PIR on the Investment Return

Once money is in the scheme, the returns it earns are taxed as they accrue. The rate used is your prescribed investor rate, and the reason for this lies in the type of entity a KiwiSaver scheme is.

KiwiSaver is a multi-rate PIE

A KiwiSaver scheme is a multi-rate portfolio investment entity. That means the scheme is taxed as an entity, but at each member's own rate rather than at a single flat rate. The scheme works out the income it has earned, allocates a share to each member, and applies that member's PIR to the share.

The rates for New Zealand tax-resident individuals are 10.5%, 17.5%, and 28%, and multi-rate PIE income is capped at 28%. Resident withholding tax is not paid on multi-rate PIE income — the PIR replaces it.

The default of 28%

If you have never given your scheme a PIR, the default rate of 28% is applied to the investment return. That is the highest of the three rates available to most individual investors, and it is the rate that applies by omission rather than by choice.

For a member whose correct rate is 10.5% or 17.5%, the default overstates their tax liability for as long as it remains in effect. Because the rate stays in place until it is changed, an unexamined default can run for years without producing any notification.

You must also give the scheme your IRD number. For a new investment, you have six weeks to provide it, after which the account is closed.

What KiwiSaver Tax Does Not Touch

There is a concession attached to KiwiSaver income that does not apply to every investment. KiwiSaver PIE income does not affect Working for Families or student loan entitlements.

This matters because other multi-rate PIE income does count, and can be adjusted in myIR or on an IR215 form. A member holding a KiwiSaver scheme alongside an ordinary managed fund therefore has two positions treated differently, and only one of them feeds into those entitlements.

The Two Rates Most Members Have Never Checked

The first thing to check is the PIR on your scheme, because that one is yours to supply and yours to get wrong. Log in to your provider, find the prescribed investor rate on the account, and compare it with the PIR rules for your income in the two income years before the current tax year. If the account shows 28% and your income does not justify it, that is money leaving the fund every year.

The second is harder, because the ESCT rate is applied by your employer rather than by you. It follows your salary band, so the practical check is whether the band used matches your actual pay. The rate changes as your earnings cross each threshold, and an employer with an out-of-date figure will keep using it.

Neither rate announces itself when it is wrong. Both are worth confirming once, and then again whenever your income or your job changes.

Questions You Might Have

Do I pay tax on my own KiwiSaver contributions?

Not again. Your employee contributions are deducted from pay that has already been taxed, so the contributions themselves are not taxed a second time. The default employee rate is 3.5% of that already-taxed pay.

Why is my employer's contribution taxed but mine is not?

Because an employer contribution is remuneration and would otherwise be a lightly taxed way of paying staff. It is taxed as it goes in through ESCT. Your contribution is simply your after-tax money set aside, so there is nothing left to tax.

What rate is used on the investment return?

Your PIR. KiwiSaver is a multi-rate PIE, so returns within the fund are taxed at your prescribed investor rate rather than at a flat scheme rate. If you have not supplied one, 28% is applied.

Can a low PIR be chosen freely?

No. You can only choose 10.5% or 17.5% if you are eligible for either, and if you provide the wrong PIR, you may have additional tax to pay at the end of the year. There is no PIR of 0% for ordinary members.

Where can I find the rates I am actually on?

The PIR is shown on your provider's account or statement, and your employer can confirm the ESCT rate being applied to their contributions. Both are worth asking about directly, because neither appears on a standard payslip in a way that makes it obvious.

What Matters Most

KiwiSaver is taxed twice over, at the entry point and inside the fund, and the two taxes have nothing in common except the account they sit in. One follows your salary band and is applied by your employer; the other is supplied by you and applies to everything the fund earns.

Because the second rate remains in effect until it is changed, and because the default is 28%, the single most valuable thing an average member can do is confirm that their PIR is correct. The ESCT rate is worth confirming too, and it is the easier of the two to overlook because you never chose it.

Every band and rate here is taken from Inland Revenue's published guidance. Where a figure could not be confirmed against that source, it does not appear in this guide.