How much tax does a NZ sole trader actually pay?

Ask what tax a contractor pays and you'll hear everything from "a third" to a horror story. The real answer is a calculation, not a folk number, and it's worth doing properly because your set-aside rate hangs off it. This guide runs the actual math across four income levels, then covers what moves the number in practice.

Marginal rates: how the brackets actually work

New Zealand taxes personal income in slices. Each rate applies only to the income inside its band:

• 10.5% on income up to $15,600
• 17.5% from $15,601 to $53,500
• 30% from $53,501 to $78,100
• 33% from $78,101 to $180,000
• 39% above $180,000

Nobody pays their top rate on everything. A contractor "in the 33% bracket" pays 10.5%, 17.5%, and 30% on the earlier slices first, which is why the effective rate (total tax as a share of total income) always sits well below the top marginal rate.

The math at four income levels

Income tax on taxable profit (income after deductible expenses, before GST):

Two observations worth internalising. First, the effective rate climbs slowly: doubling profit from $120,000 to $250,000 moves it only six points. Second, your set-aside percentage should track your effective rate, not your top bracket; a $120,000 contractor setting aside 33% for income tax is over-reserving by about $10,000 a year.

Income tax isn't the whole bill

On top of the table:

• ACC levies, roughly another 2% of earnings for low-risk desk work (capped, and higher for riskier classifications).
• GST, if registered, though it's not really your money: you collect 15% on top of invoices and pass it on, minus what you paid on business purchases.

How each of these works, and when they're due, is covered in NZ contractor tax, explained and the tax calendar.

What moves the number

• Deductible expenses move it down. Tax is on profit, not turnover. Home office, work travel, equipment, software, professional fees: every legitimate deduction comes off before the brackets apply.
• Other income moves it up. A part-year salary, rental income, or investment income stacks on top of contracting profit and can push your top slices into higher brackets.
• Income timing matters at the edges. A one-off spike year can pull income into 39% territory that a steadier profile would have kept at 33%.

How Coffer helps

This guide's math is exactly what Coffer runs continuously: it projects your year's income from your actual invoices, applies the bracket math to get your effective rate, and ringfences that percentage from every payment as it lands, adjusting as the year's picture changes. You can try the arithmetic on your own numbers with the free take-home pay calculator.