Tax Codes Explained: What They Are, and Which One to Use

Starting a new business or managing multiple income sources is exciting, but it also comes with responsibilities—like understanding how taxes work. Tax codes might sound complicated, but they’re tools to help you and your payers calculate the correct amount of tax to deduct. Let’s take a closer look at tax codes and understand them.

What Are Tax Codes and Why Do They Matter?

Tax codes are like labels that inform an employer how much tax to deduct from your income. They’re based on your expected annual income and ensure you’re taxed at the right rate.

Main Tax Code: Used for your primary income source (e.g., your main job or business).

Secondary Tax Codes: Used for additional income sources (e.g., a side hustle, pension, or benefit).

Using the correct tax code ensures you don’t overpay or underpay tax. It’s all about staying on top of your finances and avoiding a big bill (or refund) at the end of the year.

How to Choose the Right Tax Code

Start with Your Main Income: Use the IR330 tax code declaration form to determine the right code for your primary income source.
Add Secondary Codes for Extra Income: If you have multiple income streams (e.g., a second job or ACC payments), use secondary tax codes like SB, S, SH, ST, or SA depending on your total annual income.
Update When Things Change: If your income changes (e.g., you pay off a student loan or start a new job), update your tax code to reflect your new situation.

Pro Tip: Use the taxable income calculator on the IRD website to estimate your total tax liability and ensure you’re using the correct codes.

Common Scenarios and Tax Codes

Here’s a quick guide to tax codes for specific situations:

Student Loans: Use a tax code with SL (e.g., M SL) to ensure repayments are deducted.
Paid Parental Leave (PPL): Choose a tax code as you would for any other income.
ACC Payments: Use a tax code based on whether ACC is your main or secondary income.
Casual Work: Use CAE for casual agricultural work or NSW for seasonal work.
Benefits: If you receive a benefit from MSD, the income portion is always coded as M.

Source: IRD Tax Code Declaration IR330 Form.

What Happens If You Get It Wrong?

If you use the wrong tax code, you might end up with:

Overpaying Tax: You’ll get a refund, but that’s money you could have used during the year.

Underpaying Tax: You’ll face a bill at the end of the tax year.

To avoid this, double-check your tax codes and update them whenever your income changes. If you’re unsure, the IRD can help you apply for a tailored tax code to ensure you’re paying the right amount.

Tailored tax codes

You can apply for tailored tax codes, rates, or exemption certificates to ensure you pay the right amount of tax, especially if you often face large tax bills or refunds. These options are customized to fit your unique situation, whether you earn from:

a primary job
side hustles contracts
benefits
pensions
overseas income.

Tailored tax solutions last one tax year (from approval to 31 March), helping you avoid surprises and focus on your financial goals.

Tips for New Businesses and Individuals

Keep Records: Track all your income sources and tax codes in one place.
Stay Updated: Tax rates and codes can change, so check for updates regularly.
Ask for Help: If you’re unsure, consult a tax professional or use the IRD’s online tools.
Plan Ahead: Set aside money for tax payments to avoid cash flow issues.

Understanding tax codes doesn’t have to be complicated. With the right knowledge and tools, you can confidently manage your taxes and focus on growing your business or income streams. Remember, the key is to stay informed, use the correct tax codes, and update them as your situation changes. Happy earning—and taxing!

Find out more

Ready to take control of your taxes? Download the IR330 tax code declaration form here.

or click below to use the IRD’s calculators:

Income Tax Calculator

PAYE Deductions Calculator

Need Help with Accounting? We’re Here for You!

Contact us at DAD Accountant today to schedule a consultation and see how we can simplify your accounting. Let us handle the numbers so you can focus on growing your business and reaching your goals.

February 11, 2025