Fiscal Drag Calculator NZ
This calculator shows how much fiscal drag, also known as bracket creep, adds to your tax bill when New Zealand's PAYE thresholds stay frozen while your salary keeps rising. Budget 2026 left the bands unchanged, so every pay rise pushes more income into higher brackets even though the rates themselves have not moved. Enter your current annual salary before tax, choose an expected annual pay rise from 2% to 5% or a custom rate, and pick how many years the thresholds stay frozen, from 3 to 10 years or a custom period. The calculator works out your PAYE and effective tax rate today, then compares a future year under two scenarios: bands left frozen, and bands lifted in line with your pay (the indexed benchmark). You get your effective tax rate now and in year N, the extra tax bracket creep costs you in that final year, and the cumulative extra tax across the whole period, backed by a year-by-year comparison table. Use it to see how much of a pay rise is really being clawed back through frozen thresholds, particularly if a rise pushes you across the $53,500 or $78,100 mark. Figures are indicative estimates based on current PAYE bands and a constant pay rise; they exclude ACC levies, KiwiSaver and student loan repayments, and are not tax advice.
1. Your Income
2. Time Horizon
The indexed scenario assumes the brackets are raised by the same percentage as your pay each year, so your effective tax rate would stay flat. The difference is the cost of fiscal drag.
Year by Year: Frozen Bands vs Indexed Bands
| Year | Salary | PAYE (frozen bands) | Effective rate | PAYE (indexed bands) | Extra tax (drag) |
|---|
Today vs Year N
Cost of Fiscal Drag
What Is Fiscal Drag (Bracket Creep)?
Fiscal drag, also called bracket creep, is what happens when income tax thresholds are left unchanged while wages rise. Pay increases push more of your income above each threshold and into higher tax brackets. Over time a larger share of your income is taxed at higher rates, so your effective tax rate (the total tax you pay as a percentage of your income) climbs steadily, even though the headline tax rates have not changed at all.
The catch is that much of a typical pay rise just keeps up with the rising cost of living. If your pay goes up 3.5% but prices also rise around 3%, you are barely better off in real terms, yet you can end up handing over a noticeably larger slice of your income in tax. That is why economists describe frozen brackets as a quiet or stealth tax increase: the government collects more without legislating a higher rate.
Did Budget 2026 Cut Income Tax?
No. Budget 2026 kept the PAYE income tax thresholds unchanged. New Zealand does not automatically index its tax brackets to inflation or wage growth, so unless the government deliberately lifts the thresholds, fiscal drag raises tax revenue every year. The brackets have been frozen since 31 July 2024, when the last set of threshold increases took effect. Leaving them frozen through Budget 2026 means most workers will pay a higher effective tax rate this year than last, purely because their pay rose while the bands did not.
Current NZ Income Tax Bands
These are the PAYE thresholds used by this calculator. They have applied since 31 July 2024 and were unchanged in Budget 2026.
| Taxable Income | Tax Rate |
|---|---|
| $0 to $15,600 | 10.5% |
| $15,601 to $53,500 | 17.5% |
| $53,501 to $78,100 | 30% |
| $78,101 to $180,000 | 33% |
| Over $180,000 | 39% |
These figures exclude the ACC earners' levy and do not account for KiwiSaver, student loan repayments, or tax credits. They show PAYE on salary or wages only.
How This Calculator Works
- It works out your PAYE today using the current frozen bands.
- It grows your salary by your chosen pay rise each year for the number of years you set.
- For each future year it calculates PAYE two ways: once with the bands left frozen, and once with the bands lifted by the same percentage as your pay (the indexed scenario, where your effective rate stays flat).
- The gap between the two is the extra tax fiscal drag costs you. The calculator shows this for the final year and added up across the whole period.
The indexed comparison is the fairest benchmark for fiscal drag because it isolates the effect of frozen thresholds. If the bands moved in step with your income, your effective tax rate would not change, so any rise in your effective rate is fiscal drag at work.
Worked Example
Take a $80,000 salary with 3.5% annual pay rises over 5 years (the default settings above):
- PAYE now is about $16,278, an effective rate of 20.35%.
- After 5 years the salary grows to about $95,015.
- With frozen bands, PAYE rises to about $21,232, an effective rate of 22.35%.
- If the bands had been lifted 3.5% a year (indexed), PAYE would be about $19,333, keeping the effective rate at 20.35%.
- That is roughly $1,900 of extra tax in the final year, and about $5,569 of extra tax across the full 5 year period.
The effective rate climbing from 20.35% to 22.35% on the same real income is fiscal drag in action: two percentage points more of your income going to tax, with no change to the headline rates.
Who Feels Bracket Creep the Most?
Fiscal drag bites hardest when a pay rise pushes income across a threshold. A worker moving from just under $53,500 to just over it starts paying 30% on the extra income instead of 17.5%. The same applies at the $78,100 step up to 33%. Middle and upper income earners typically feel the largest dollar effect, but lower earners can feel it sharply in percentage terms when even a small rise crosses the $15,600 or $53,500 lines. The longer the thresholds stay frozen, the larger the cumulative cost for everyone.
Related Calculators
- PAYE Calculator: your pay after tax, ACC, KiwiSaver and student loan.
- Income Tax Calculator: income tax across the current bands.
- Effective Tax Rate Calculator: your average tax rate on total income.
- Take Home Pay Calculator: net pay per week, fortnight and month.
Sources: Inland Revenue (IRD) income tax rates for individuals (ird.govt.nz/income-tax/income-tax-for-individuals/tax-codes-and-tax-rates-for-individuals/tax-rates-for-individuals). New Zealand Government Budget 2026 (budget.govt.nz). PAYE thresholds in force since 31 July 2024.
This calculator provides indicative estimates only. It models PAYE on salary using the current frozen thresholds and a constant annual pay rise; real pay rises, inflation, and future government decisions will vary. The indexed comparison is an illustrative benchmark, not a forecast of any planned threshold change. Figures exclude the ACC earners' levy, KiwiSaver, student loan repayments and tax credits. This is general information, not tax or financial advice. Check ird.govt.nz for current rates.