The changes in Resident Withholding Tax (RWT) rates are not an increase in tax. They ensure that the tax people pay throughout the year is aligned with their actual income tax rate, so that people are less likely to face tax bills at the end of the year.

RWT is not a separate or additional tax on income. At the time that a bank or a financial institution pays interest income to a person, they withhold tax on that interest, and the tax is then transferred to Inland Revenue. Inland Revenue then credits the tax towards the person’s actual tax liability on their total income. By aligning the RWT rate with a person’s actual income tax rate, it helps ensure that people do not face tax bills at the end of the year.

Currently (before 1 April 2010), the RWT rates are 19.5 per cent, 33 per cent, and either 38 per cent, or 39 per cent.

Tax cuts to personal income tax rates were made in 2008 and 2009. At the time, the RWT rates were not adjusted to align with the new income tax rates because banks needed more time to change their banking systems. Instead, the changes to the RWT rates were delayed until 1 April 2010 to give banks and financial institutions time to make the changes. The new RWT rates that will take effect on 1 April are 12.5 per cent, 21 per cent, 33 per cent, and 38 per cent. These accurately align RWT rates with the actual income tax rates for all taxpayers.

Having a 21 per cent RWT rate for people earning between $14,000 and $48,000 instead of a 19.5 per cent rate will reduce the likelihood that those people will receive an end-of-year tax bill, because they will be paying the correct proportion of tax on their interest income during the year.