Earning more can be as easy as PIE
Dave McLeish
February 3, 2025
As the saying goes “a fine is a tax for doing something wrong while a tax is a fine for doing something right”.
Savers know this better than anyone. First, we’re taxed for working. Then we’re taxed for saving. Which is why it’s so important we don’t pay any more tax than we absolutely need to.
Most of us don’t know it, but we’re paying way too much tax. In doing so, we are losing out on hundreds of millions of dollars each year.
The problem exists because, if you’re anything like me, you’ll do almost anything to avoid thinking about tax. But before you click away thinking you were sucked in by the catchy title, and that this is just some boring tax article, I promise you it’s not.
The interest you earn on the money you have in a bank savings account is taxed at your personal income tax rate. This tax is called Resident Withholding Tax (RWT) and is deducted by the bank as soon as your interest is earned and paid.
This means, if you earn more than $53,501 per annum you will be paying at least 30% tax on the interest you earn in that account. According to recent data, this is more than half of all New Zealanders currently earning a wage or salary1.
However, no one should be paying 30% tax on their savings, let alone 33% or even 39% for those in the highest income tax bracket.
To ensure you’re not overpaying tax, you should be saving through a Portfolio Investment Entity (PIE).
That’s because, with a PIE, the interest you earn on your savings is taxed at your Prescribed Investor Rate (PIR), which is capped at 28%.
But the benefits of a PIE are not just limited to higher income earners.
Because your PIR is based on your total income over the last two income years, those who have recently moved into a higher income tax bracket can often remain in the lower tax paying bracket for longer through saving with a PIE.
And if you’re not one of those mentioned above, you’re simply no worse off saving through a PIE.
As well as it being a smart way for most people to lower their taxes, PIE’s also simplify things.
The administrator of each PIE is responsible for paying tax on your behalf and they will only pay this at the end of the tax year. Which means you get to earn interest throughout the year on the tax you owe but haven’t yet paid.
That way, you get to keep more of what’s yours without any extra effort or stress.
You can look at the benefits of saving with a PIE a few different ways.
The first is by calculating the “effective interest rate” you will receive when savings through a PIE when compared to a standard bank account.
Or said another way, this is the equivalent annual rate of return you’d need to be paid in a bank account to match the after-tax return you’d get from saving through a PIE.
As you can see, the effective boost you get from saving through a PIE can be big (a massive 18% more income in the case of a 39% taxpayer).
Another way to look at things is to put some dollars behind these interest rates – which can really bring the benefits to life.
Sticking with the above example, that same high income earner with $50,000 of savings would save $4,217.06 in tax over a ten-year time period if they saved through a PIE instead of a bank account.
Time to re-evaluate where your savings are kept?
1. Figure.NZ Data - Wage and Salary Distributions for the Tax Year Ended 31 March 2024
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