What is fiscal drag or bracket creep?

Fiscal drag, also called bracket creep, happens when income tax thresholds stay fixed while wages rise. As your pay increases over time (often just to keep up with inflation), more of your income is pushed into higher tax brackets, so a larger share of your income is taxed at higher rates. Your effective tax rate climbs even though the tax rates themselves have not changed and you may be no better off in real terms. New Zealand's PAYE thresholds are not automatically indexed to inflation or wage growth, so fiscal drag quietly raises tax revenue every year the bands are left frozen.

Did Budget 2026 cut income tax in New Zealand?

No. Budget 2026 kept the PAYE income tax thresholds unchanged. The brackets have been frozen since 31 July 2024, when the last threshold changes took effect: 10.5% up to $15,600, 17.5% up to $53,500, 30% up to $78,100, 33% up to $180,000, and 39% above $180,000. Because the thresholds did not move while wages continued to rise, most workers pay a higher effective tax rate each year. Leaving brackets frozen is sometimes described as a stealth tax increase because it raises the tax you pay without any change to the headline rates.

How much does bracket creep cost me?

It depends on your salary, the size of your pay rises, and how many years the thresholds stay frozen. For example, on an $80,000 salary with 3.5% annual pay rises over 5 years, your salary grows to about $95,015. With frozen bands you would pay around $21,232 PAYE, against about $19,333 if the bands had been lifted by the same 3.5% each year. That is roughly $1,900 of extra tax in that final year alone, and close to $5,569 of extra tax across the full 5 year period. Higher earners and those crossing a threshold feel fiscal drag the most. Use this calculator to estimate your own figure.

Fiscal Drag (Bracket Creep) Calculator

See how frozen tax thresholds quietly raise your tax over time. When your pay rises but the income tax brackets stay fixed, more of your income is taxed at higher rates and your effective tax rate climbs. This is called fiscal drag or bracket creep.

Budget 2026 kept New Zealand's PAYE thresholds unchanged. The bands have been frozen since 31 July 2024. Enter your salary, expected pay rises, and a time horizon to see the extra tax you pay because the thresholds did not move with your income.

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Updated June 2026 Current NZ PAYE thresholds (frozen since 31 July 2024). Budget 2026 made no threshold change.

1. Your Income

Current annual salary (before tax)

Expected annual pay rise

Custom pay rise per year

% / yr

2. Time Horizon

Number of years thresholds stay frozen

Custom number of years

years

Compare against

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.

Your Fiscal Drag Result

Effective Rate Now

PAYE as % of salary

Effective Rate in N Years

Frozen bands

Extra Tax Over Period
-
vs indexed bands

Extra Tax, Final Year

In year N alone

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

Salary now-

PAYE now-

Effective rate now-

Salary in year N-

PAYE in year N (frozen)-

Effective rate in year N-

Cost of Fiscal Drag

PAYE in year N, frozen bands-

PAYE in year N, indexed bands-

Extra tax in final year-

Years in period-

Extra tax over whole period-

Effective rate rise-

Summary: Enter your salary above.

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.