Why is the tax on an employee's pay different to normal?

PayHero's tax calculations have been designed to comply with IRD specifications, so the tax in PayHero is extremely accurate. However, there can be situations where the tax calculation result is different to your expectations. This article discusses the most common reasons for variations in tax calculation.

Check through each of the sections below carefully to identify why the tax for an employee may have changed, or appear different to what you'd expect.

Overlapping Pays

If you notice that the tax deducted from an employee's pay is higher than usual, the most common reason is that the employee has already been paid for this pay period. You can investigate this by checking the Pay Period of this pay and comparing it to the employee's earlier pays. The employee's Pay History tab is a great place to check this. 

If the employee has already been paid for this period, PayHero will use the total earnings for this pay period (across both pays) to calculate the tax. The tax that has already been deducted from the earlier pay is subtracted from the result, and this pay will be taxed the remaining amount. 

In many cases, this is absolutely correct, particularly if the employee's total wages for that period have been split over two pays. In some cases, however, you may need to take a closer look at why there are two pays for the same pay period. 

Is the pay period on this pay correct?  If it's not, you'll need to delete the draft pay and then create it again with the correct period. There's more information about updating pay periods here. 

Is the pay period on the previous pay correct? If it's not, you might need to revert that pay to draft and correct it. Here's how to do that: Fixing a mistake in a Sent pay

Lump sum payments

Additional one-off elements in a pay can affect the PAYE calculation, particularly bonus payments, discretionary payments, or final pays. 

Lump sum payments are taxed by using the employee's total earnings in the past four weeks to estimate their annual income and select the appropriate tax rate. You can learn more this tax calculation from IRD here.

Extra pays (including back pays), cashed up Annual Leave, some Bonus payments, and leave payments in a final pay require the employee's pay history to calculate the tax. IRD's PAYE calculator does not have this information available, so it's expected that it won't correctly calculate the PAYE in these cases. 

Comparison to Other Calculations

If you are comparing the results that you get with PayHero to another system, e.g. the IRD PAYE Calculator or another payroll system, and you see some differences there are a few simple things that you can check.

Are you comparing apples with apples?

The main three factors that determine how PAYE is calculated are:

• the gross earnings
• the tax code
• the pay period

The first step is checking that these are the same in both systems. You can usually work out the cause of any differences in PAYE by comparing the information entered. The most common reason for tax calculation variations that we see in support requests is differences in pay period - comparing the tax on the same earnings but for different pay frequencies, e.g. weekly vs fortnightly.

Lump sum payments

If you're comparing PayHero's tax calculation to the same pay in a different payroll system, and there are any lump sum payments in this pay, check if the employee's pay history in the past 4 weeks is identical in both systems.  This history is used to estimate the employee's annual earnings to set the appropriate tax rate for the lump sum, so differences in pay history may lead to differing results. 

If you've recently moved from a different payroll system, you may need to add some pay history information for the employee, so PayHero can calculate their lump sum tax. 

Withholding Tax

NZ tax calculations are done on truncated whole dollars of gross earnings. A common question we have around employees on a flat withholding tax percentage is why the tax isn't the exact percentage of the total earnings. The answer is that the cents need to be taken off before the percentage is applied. So 20% withholding tax on $100.90 is $20, not $20.18.

Student Loan 

If the employee has a student loan tax code (e.g. 'M SL') but there is no student loan repayment in their pay, the most common reason is that they have not reached the minimum earnings threshold. This is currently $439 per week for the 2024 tax year. Any earnings less than that do not have student loan repayments deducted.   The IRD website has more information on student loan thresholds. 

1 April changes

There are often minor changes to ACC earnings levies on 1 April each year, which can result in minor changes to the tax calculation. 

If you're using IRD's PAYE Calculator to check the tax, use the Pay Date of the pay to select the correct tax year. If the pay date is on or later than 1 April, the tax year is March in the following calendar year.

The student loan repayment threshold is often adjusted on 1 April, which might result in changes to the employee's Student Loan deductions. You can find out more about the Student Loan threshold on IRD's website.