Why Your KiwiSaver Employer Contributions Are Less Than Yours When You Are Both Paying 3%

(This is a repost from thesmartandlazy.com, published on June 2, 2017)

By New Zealand law, employers are required to contribute to their employee’s KiwiSaver account or complying fund at 3% of their gross salary or wage if the employee has joined Kiwisaver. However, when you look into your KiwiSaver contribution transaction record as an employee, you may notice the employer contribution amounts are less than your employee contribution.

Screen Shot 2017-06-02 at 3.18.52 PM.png

Here is an example, assume your weekly income before tax is $1200, $62400/year.

Without KiwiSaver, your take home pay will be $1200 – 225.77 (PAYE) – 16.68 (ACC) = $957.55.

If you join KiwiSaver and contribute 3%, your take home pay will be $1200 – 225.77 (PAYE) – 16.68 (ACC) – 36 (KiwiSaver) = 921.55. On your KiwiSaver statement, your contribution will be $36, however, your employer contribution will be $25.2, not $36. Why?

The reason is that employer contributions are taxed under Employer Superannuation Contribution Tax (ESCT). Your employer pays out an extra 3% of your income to KiwiSaver but part of that went to IRD as tax.

Screen Shot 2017-06-02 at 9.50.20 PM.png

You may think ‘If both employer and employee are paying 3%, how come the cash hit my KiwiSaver fund is different?’ (That was me two days ago)

Let’s break it down in detail. The 3% contribution is calculated based on your income before tax. In our example, the weekly 3% KiwiSaver contribution will be $1200 x 3% = $36. So both employee and employer will pay $36 each into the KiwiSaver Fund.

Here is the tricky part, on the employee contribution, it was calculated based on pre-tax income and taken out of after-tax income. So the $36 will be taken out after they deduct PAYE and ACC and that $36 will reach your KiwiSaver fund without IRD taking out any more tax.

On the other hand, employer contributions will be taxed under ESCT. So 30% of $36 = $10.80 will go to IRD, and the cash that hits your KiwiSaver fund will be 36 – 10.8 = $25.2

RE KiwiSaver 1 - Page 1-3

Therefore, I was wrong by saying you will have 100% return on your employee contribution. It’s more like 67%-89.5% return. It’s still an unbeatable risk-free guaranteed return and one of the best investment in New Zealand.

Check out IRD website on ESCT for more information.

Published by

Alpha Leung

Not a DIY Investor but a Do-as-little-as-possible investor. Try to achieve financial freedom by being smart on just a few things, and then to be "lazy" by not doing much else.

3 thoughts on “Why Your KiwiSaver Employer Contributions Are Less Than Yours When You Are Both Paying 3%”

  1. Based on your first sentence, I feel like I should mention something for people to keep in mind. Some employers can apparently get away with paying their employer contribution out of your wages. Like when I worked at LIC on a fixed term contract (a large proportion of people in my area of the business had roll over 2 year fixed terms), they wrote in the contract that both contributions would come out of my wages. My parents told me it must just be funny wording as that is not the way kiwisaver works, but lo and behold, I got my first payslip and that is the way it works. I checked it out with IRD and somehow that is legit.

    So read any new employment contracts carefully, and take that in to account when considering your new pay rate.

Leave a Reply

Your email address will not be published. Required fields are marked *