The design of the Working for Families scheme could see lower income households stung with a huge tax rate. File photo. Photo: RNZ
Some lower-income families could face an effective marginal tax rate of more than 100 percent in 2027 unless something changes, one tax expert is warning.
The possible high rate is because of the design of the Working for Families scheme.
The scheme includes a minimum family tax credit, available to households who earn under a set income threshold, which is adjusted annually.
The credit is currently available to those households earning up to $35,204 after tax and tops up after-tax household income to at least $677 a week.
It is designed to give people more than they could receive on a benefit. The more you earn, the less you can get. This credit has an abatement rate of 82.5 percent.
Terry Baucher. Photo: Supplied
But tax expert Terry Baucher pointed to the Budget's regulatory impact statements which show that - at the current rate of increase - that threshold is set to overlap on 1 April 2027 with the $42,700 annual before-tax household income threshold at which all Working for Families entitlements are clawed back at a rate of 27 percent. This threshold is not automatically adjusted.
When the minimum family credit threshold lifts to $43,000, a solo parent working 25 hours a week and earning $42,700 would face an effective marginal tax rate on any further earning of 128.6 per cent.
The person would pay 17.5 percent income tax, 82.5 percent in reductions to their minimum family tax credit entitlement, 1.6 percent in ACC levies and 27 percent in Working for Families abatement.
"This is every extra dollar above $42,700 that's what's going to happen. If someone has student loan repayments and they are receiving an accommodation supplement those reductions will kick in as well," Baucher said.
Baucher said many people would be surprised at the effective rates of tax that were being applied to people losing support from systems such as Working for Families.
And while the government has lifted the in-work tax credit portion of the Working for Families package to $25 a week, the abatement threshold and abatement rate mean that on average most people will receive just under $17.
"They're losing a third of it to abatement already, but the government will talk about 'yeah, you're getting $25 a week'."
He said people who were earning less than $48,000 and getting Working for Families had an effective tax rate that was higher than the prime minister or finance minister.
"It's a key point because you hear plenty of people saying 'people need to get off their arses and work' and it just doesn't work like that. It's not as simple as that. If you've got abatements you go backwards if you take on extra work, let alone if you're incurring extra costs such as travel and childcare."
