The rate your bank deducts from your interest

You picked a number in a form once, possibly never. It decides whether your term deposit interest is settled by the time it lands or waiting for you in an end-of-year bill.

RWT rates you may choose

10.5, 17.5, 30, 33 or 39%

No IRD number given

45%

IRD number but no rate chosen

33%

PIR rates for an individual

10.5, 17.5 or 28%Inland Revenue, New Zealand resident PIE income

No PIR given

28%Inland Revenue, New Zealand resident PIE income

Two different systems, and which one you are in

Interest from a savings account or term deposit has resident withholding tax taken off before it reaches you. Money in a portfolio investment entity, which includes most KiwiSaver funds and many managed funds, is taxed at a prescribed investor rate instead. They look similar from the outside and behave differently in ways that matter at the end of the year.

The practical difference: RWT is a prepayment, squared up in your income tax assessment. A PIR applied correctly is closer to final, and where it is wrong the correction runs through a separate PIE calculation rather than through your ordinary income tax.

The RWT rates, and the two numbers nobody chooses

Inland Revenue's wording is direct: if you have given your interest payer your IRD number, you may use the 10.5%, 17.5%, 30%, 33% or 39% rate, and it should match your income tax rate. The bands are on total taxable income: up to $15,600 is 10.5%, $15,601 to $53,500 is 17.5%, $53,501 to $78,100 is 30%, $78,101 to $180,000 is 33%, and above $180,000 is 39%. Those thresholds moved on 31 July 2024; the percentages did not. Inland Revenue, using the right RWT rate (opens in a new tab).

Two rates get applied by default rather than chosen. If you have not given your IRD number, interest is taxed at 45%, the non-declaration rate. If you have given your IRD number but not picked a rate, tax comes off at 33%. Inland Revenue, using the right RWT rate (opens in a new tab).

The amount withheld is reconciled in the end-of-year income tax assessment. A default withholding rate is not necessarily the final rate of tax on that interest. Inland Revenue, using the right RWT rate (opens in a new tab).

A rate that does not match leaves a bill

Inland Revenue puts it as a mismatch rather than as being too low: if the RWT rate you choose does not match your income tax rate you may receive an end of year tax bill. The same page asks you to tell your payer when your circumstances change, because using the wrong rate may mean an end-of-year bill.

Joint accounts are where this bites hardest, and Inland Revenue works through it directly: if one account holder earns over $53,500 and the other $53,500 or less, choosing the 30% rate will avoid the higher earner having an end-of-year tax bill. One account, one rate, two different people's tax positions. Inland Revenue, using the right RWT rate (opens in a new tab).

The PIR, and its two-year look-back

A prescribed investor rate is the tax rate applied to income from a multi-rate PIE, and your KiwiSaver scheme is probably one. For an individual the rates are 10.5%, 17.5% and 28%, and you cannot choose 0%. Inland Revenue, New Zealand resident PIE income (opens in a new tab).

The test is not about this year. It looks at either of the last two income years, and it has two limbs: your taxable income excluding PIE income, and your taxable income including it. The income bands that choose between 10.5%, 17.5% and 28% are applied by the Work out my prescribed investor rate questionnaire, which asks for your last two years of income and returns a single answer. Either of the two years qualifying is enough, which is why a single low-income year keeps a lower rate available for a while. Inland Revenue, New Zealand resident PIE income (opens in a new tab). Inland Revenue, work out my prescribed investor rate (opens in a new tab).

Too low and too high are not mirror images

Get the PIR too low and the shortfall becomes a PIE debt, added to any income tax you have to pay. It can also make you a provisional taxpayer: residual income tax including a PIE debt of more than $5,000 brings provisional tax the following year. Inland Revenue, end-of-year PIE calculation (opens in a new tab).

Get it too high and the excess becomes a PIE credit, used against income tax you owe, with any remainder refunded. So over-withholding is recoverable and under-withholding follows you into the next year. Inland Revenue, end-of-year PIE calculation (opens in a new tab).

One case reverses that, and it is the one people do not see coming. Where the fund made a loss, using a PIR that was too high produces a PIE debt rather than a credit, because the higher rate handed back more loss relief than you were entitled to. Inland Revenue's own worked example runs to $327.60 owed on a fund that lost money. Inland Revenue, end-of-year PIE calculation (opens in a new tab).

What a correct PIR does and does not settle

Attributed income from a multi-rate PIE is assessed in a separate end-of-year PIE calculation. Inland Revenue compares the tax paid with the tax due at the correct PIR for the full year. That calculation is separate from the tax calculation on ordinary taxable income. Inland Revenue, end-of-year PIE calculation (opens in a new tab).

Entitlements are the exception worth knowing. PIE income from a locked-in fund, such as KiwiSaver, is not counted for Working for Families or student loan calculations. PIE income from anything not locked in, and distributions from a listed PIE, are counted. Inland Revenue, end-of-year PIE calculation (opens in a new tab).

One comparison that is arithmetic rather than a quote: the top PIR available to an individual is 28%, and the top personal income tax rate is 39%. Inland Revenue publishes both figures and does not draw the comparison; it is visible either way. Inland Revenue, New Zealand resident PIE income (opens in a new tab). Inland Revenue, income tax rates (opens in a new tab).

Reported income and joint-account allocations

Financial institutions report investment income and tax withheld to Inland Revenue the month after paying it, so updates can appear in myIR. Joint investment income is split equally between holders who supplied valid IRD numbers. If that split is incorrect, it can be amended during the end-of-year assessment or income tax return; Inland Revenue may request documentation for an unequal allocation. Inland Revenue, using the right RWT rate (opens in a new tab).

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