Explainer: How to change your KiwiSaver tax rate

About 120,000 Kiwis so far have received a letter from IRD about incorrect prescribed investor rates.Photo / 123RF

If you're one of the 120,000 Kiwis to receive a letter from IRD flagging the wrong tax rate on investment funds such as KiwiSaver, the good news is it is easy to fix.

While you may be required to pay more tax than expected this year due to an incorrect prescribed investor rate (PIR) supplied to your KiwiSaver or investment provider, to correct this you just need to contact your provider whether it be your bank or investment management company to have it changed.

Those who have their PIR set too high will not receive a refund for the extra tax paid.

Tom Hartmann, managing editor of Sorted website at the Commission for Financial Capability, said it was low income earners who had been hit by paying too much tax.

"PIR tax is considered a final tax, so refunds are unavailable. We don't think this is fair, considering people are being sent bills for underpaid PIR tax," said Hartmann said. "It is those low income earners who have been hit by paying too much tax, which they can least afford.

"The other negative impact is the reduced results they'll receive from their KiwiSaver fund over the long term due to their growing principal being taxed too much."

According to Inland Revenue's website, the PIR for residents is based on income from the last two years. The prescribed guideline rates are 10.5 per cent for those earning a taxable income of between 0 and $14,000, 17.5 per cent for those between $14,001 to $48,000 and 28 per cent for those earning more than $48,001.

IRD moved to a new automated and digitised system in April which has the ability to detect who is paying the incorrect rates. The system found that about 450,000 Kiwis were paying the wrong tax rate.

In the past IRD relied on people selecting their correct PIR, but the new system meant they could check whether they had.

IRD does not yet have a figure on how much money it could retrieved following the incorrect tax rates applied in the last financial year. It will only seek to retrieve tax incorrectly paid in the last financial year. Previous years of incorrectly paid tax will be exempt from the clawback.