Hnry: Freelancers shouldn’t panic about new tax rate

Hnry, the company that processes and pays self-employed people’s taxes in real-time, says those people are losing out on their true salaries because of traditional accounting advice.

Chief executive James Fuller told BusinessDesk the longstanding guidance for freelancers of putting a third of earnings to one side for their year-end tax bill is leaving Kiwis with much less money throughout the year.

With the new 39% personal tax rate on income above $180,000 applying from April 1, he is concerned people may put even more money aside unnecessarily.

“Across all of your income, it's actually nigh on impossible to achieve an actual blended tax rate of 33%,” said Fuller.

He said many self-employed people get to the end of the year and find out their tax rate was only around 25% of their earnings.

Hnry analysed its user data and claims less than a quarter of 1% of its customers need to save as much as 33%.

“You think about all the challenges people have with their finances, this kind of arbitrary advice of 33% has kind of hamstrung a lot of people.”

He recalled a recent conversation with “some friends of mine who are old school accountants” about the new tax rate.

“I said, when the top rate of tax changes, what are you going to advise your clients, 39%? And they both looked at each other and said, 'oh, we’d probably say 35',” said Fuller.

“It’s like, literally, you’re just making this up!”

The going rate

Such traditional tax advice stems directly from NZ’s progressive tax rates that increase as income increases. With these progressive, or gradual tax rates, NZ incomes will continue to be taxed at 10.5% for the first $14,000 earned, at 17.5% from $14,001 to $48,000, and at 30% from $48,001 to $70,000.

From April 1, the tax rate will be 33% for annual income over $70,000 and up to $180,000, and then 39% for the remaining income over $180,000.

The current rate is 33% for all remaining income over $70,000.

“The proposed 39% tax rate complicates the tax system and widens the gaps between different rates,” said PwC in December, calling it “questionable tax policy design”.

The NZ government's website states: “If you do not give your provider your IRD number or let them know what tax rate they should use, they must tax your interest and investment income at 33%. If this rate is not correct you could pay too much tax”.

“Consider hiring a tax agent. Their knowledge could save you time and money,” the MBIE website cryptically teases.

Fuller suggests these tax rate percentages incorrectly reflect the reality of Hnry’s average customer’s year-end combined tax bill.

Pay as you go

Hnry customers are set up with a Hnry bank account into which they pay all their earnings. The firm’s automated systems then calculate exactly how much tax customers should be deducting and send it straight to IRD.

Hnry then pays customers the remaining balance, akin to salary after tax. It takes a 1% plus GST fee, with no additional hidden charges.

The Wellington-based company, founded in 2017, recently launched its service in Australia and supports earning in multiple currencies. Fuller said he has a shortlist of seven or eight more countries he wants to expand the service to.

A September 2019 investment round saw Hnry raise $2.15m after targeting $1.5m. Fuller said an internal investor round in late 2020 will see the firm through until a possible additional round in “late 2021, early 2022”.

While he won’t put a figure on revenue, he said growth for the last two years stood at about 12% to 13% month on month, with one month during lockdown seeing a drop of 2%.

“In February, we acquired double the number of customers that we acquired in January,” he said.

“We’re taking on more new clients every day than I think any other accountancy is doing in two to three months.”

Though New Zealand is generally praised for the current and potential openness of its banking infrastructure compared to countries like the UK, Fuller doesn’t think a more open banking environment is needed for Hnry to grow.

“We've been able to accomplish what we have without the need for things like open banking, and we do what we do with all of our automated payments, in a way that doesn't require that.”

Forward billing

He is coy about the future potential for Hnry, which has 26 employees in NZ and Australia, to list on the NZX.

“I don't think we've made any decisions about where that would go. I mean, obviously, the company is expanding extremely rapidly. At the moment, I think, the one thing we do know is that our home base will always be in New Zealand.”

He also doesn’t see the evolution of banking as a technology problem.

“It's more of a business problem of how do we prioritise customer service at the top of the tree? Which is something that we really believe in, if everyone who's in businesses is building a product or selling services for their customers, not for themselves.”