How PAYE Is Calculated
Payroll annualises: it multiplies your pay for the period out to a full year, truncates to whole dollars, applies the tax bands, adds the 1.75% ACC earners' levy, takes off the independent earner tax credit on an ME code, divides by 52, truncates to cents, and converts the result to your pay frequency.
The six steps, in order
- Annualise the pay period. Multiply the gross for this period by the number of periods in a year: 52 weekly, 26 fortnightly, 13 four-weekly, 12 monthly. Truncate the result to whole dollars.
- Apply the tax bands. Charge that annual figure across the progressive income tax bands, each rate applying only to the slice of income inside its band.
- Add the ACC earners' levy. 1.75% of the annualised figure, stopping once it reaches $156,641, so the levy never exceeds $2,741.22 for the year.
- Subtract the independent earner tax credit. Only on tax codes ME and ME SL, and only where the annualised income qualifies. $520 a year, abating above $66,000 to nil at $70,000.
- Divide by 52 and truncate to cents. Always 52, regardless of how often you are actually paid. This is the point where fractions of a cent are dropped rather than rounded.
- Convert to your pay frequency. Multiply that weekly amount by 52 and divide by the number of pay periods in your year, then truncate again. For a weekly payroll steps 5 and 6 leave the figure unchanged.
Two features of the method explain almost every payslip question. Truncation never rounds up, so PAYE lands a fraction low every period. And annualising treats each pay period as though the whole year looked like it, which is why an unusual period is taxed unusually.
Worked example: $1,250.00 a week on tax code M
| Step | Working | Result |
|---|---|---|
| 1. Annualise | $1,250.00 × 52, truncated to whole dollars | $65,000 |
| 2. Income tax on the bands | Progressive, band by band | $11,720.50 |
| 3. Add the ACC earners' levy | 1.75% of $65,000 | $1,137.50 |
| 4. Tax credit | None on code M | $0.00 |
| 5. Divide by 52 | $12,858.00 ÷ 52 = 247.269231, truncated to cents | $247.26 |
| 6. Convert to the pay period | Weekly payroll, so no conversion | $247.26 |
The PAYE line on that payslip reads $247.26. Across 52 identical weeks that totals $12,857.52, while the tax genuinely due on $65,000 of income is $12,858.00. The $0.48 difference is the truncation in step 5, and it is settled at the end-of-year square-up.
On tax code ME the same week produces $237.26, exactly $10.00 lower, because step 4 removes $520 before the division.
Worked example: $6,500.00 a month on tax code M
- 1.Annualise the month$6,500.00 × 12, truncated to whole dollars$78,000
- 2.Income tax plus the ACC earners' levy on that annual figure$16,985.50
- 3.Divide by 52 and truncate to centsThe method works in weeks even for a monthly payroll$326.64
- 4.Multiply by 52, divide by 12, truncate again$1,415.44
- PAYE on that month's payslip$1,415.44
Why 52 appears in a monthly calculation
The published method converts to a weekly amount before it converts to your pay cycle, and truncates at both points. A monthly payroll therefore truncates a larger number, and the cents it drops are worth slightly more across the year. On the same salary, monthly pay can withhold a few cents a year less than weekly pay. Nothing is wrong with either. The pay frequency calculator puts the four cycles side by side so you can see the gap.
Secondary codes skip the whole procedure
If the pay is from a second job, none of the six steps above apply. Payroll truncates the gross for the period to whole dollars and multiplies it by one flat rate, taken from the secondary code on file. There is no annualising, no band arithmetic and no division by 52.
On code S, $800.00 of gross produces $154.00 of PAYE, which is 19.25% of the gross. That published rate is 17.5% of income tax with the 1.75% ACC earners' levy already inside it, which is the single most misreported figure in New Zealand payroll.
The code is chosen on your total income from all sources, not on what the second job pays. See the tax code table for the bands.
What is calculated after PAYE, and separately
| Deduction | How it is worked out | Basis |
|---|---|---|
| KiwiSaver | Your chosen rate applied to the gross for the period, then truncated to cents. 3.5% by default | Gross pay |
| Student loan | 12% of the gross above the pay-period threshold, on an SL code only | $464.00 a week, $928.00 a fortnight |
| Employer KiwiSaver contribution | 3.5% of gross, paid on top of your pay rather than out of it | Gross pay |
| ESCT | A banded rate applied to the employer contribution, truncated to whole dollars first | Last year's salary plus employer super |
None of these change the PAYE figure, and the PAYE figure does not change any of them. They are four independent calculations on the same gross.
What this method cannot see
Payroll knows this pay period and your tax code. It does not know what you earned earlier in the year, whether you have a second job, or what you will earn next month. Every consequence of that blindness shows up at the end-of-year square-up: refunds after a part-year of work, bills after two jobs on the same code, and adjustments where income moved between bands. Why your take-home pay changed works through the cases with dollar figures.
Common questions
How do you calculate PAYE in New Zealand?
Multiply the pay for the period out to a full year and truncate to whole dollars. Apply the progressive bands to that annual figure, add the ACC earners' levy, subtract the independent earner tax credit if the code is ME or ME SL, then divide by 52, truncate to cents, and convert to the pay frequency.
Why does payroll divide by 52 when I am paid monthly?
Because the published method works in weeks. The annual figure becomes a weekly amount and is truncated to cents at that point, then multiplied back up to your pay period. It is why a monthly payslip can withhold a few cents a year less than a weekly one on the same salary. The pay frequency calculator shows all four cycles side by side.
Why is my weekly PAYE not my annual PAYE divided by 52?
Because truncation happens inside the pay period. Payroll cuts the weekly figure down to whole cents and never rounds up, so 52 weekly deductions add to slightly less than the tax due on the same annual income. Inland Revenue settles the difference after 31 March.
Does the PAYE calculation include KiwiSaver and student loan?
No. PAYE is income tax plus the ACC earners' levy. KiwiSaver is a straight percentage of gross pay, and the student loan deduction is 12% of the gross above the threshold for the pay period. Both are calculated separately and shown as their own payslip lines.
How is PAYE calculated on a second job?
No annualising happens at all. A secondary code applies one flat rate to the gross for the period, truncated to whole dollars first. The published rate already contains the 1.75% ACC earners' levy, which is why S is 19.25% rather than 17.5%.
Is a bonus calculated the same way?
No. A bonus is extra pay, with its own method: payroll annualises your recent regular earnings, adds the bonus, and taxes the whole bonus at the rate applying to the resulting figure. See how extra pay is taxed.
Where these figures come from
- IRD. Payroll calculations and business rules specification
- IRD. Tax rates for individuals
- IRD. ACC earners' levy rates
- IRD. Independent earner tax credit
2026–27 tax year (1 April 2026 – 31 March 2027). Last verified 30 July 2026.
Related
- what is PAYEThe definition, scope and boundaries
- how to read a New Zealand payslipCheck this method against a real one
- New Zealand PAYE tax ratesIncome tax and the levy as one rate
- New Zealand tax bracketsThe bands step 2 applies
- pay frequency calculatorWhere step 5 sends the numbers
- take-home pay calculatorThis method, running on your figures