Sometimes an agreed pay rate needs to include additional components like the employer's KiwiSaver contribution or holiday pay. When this happens, you need to calculate the correct base rate so that when these components are added, the total matches the agreed amount.
The key principle: We don't simply subtract the percentage from the total rate. Instead, we need to find the base value that, when the percentage is added to it, equals the agreed total rate.
Important considerations:
The calculated base rate must be at least minimum wage
If both KiwiSaver and holiday pay are inclusive, these must be calculated one after the other in the right order (see below)
Each component (base pay, employer KiwiSaver contribution, holiday pay) must be shown separately on the payslip
KiwiSaver inclusive rates (3.5%)
When an employee's pay rate includes the employer's KiwiSaver contribution, this is called a salary sacrifice. The employee is effectively paying for both their own KiwiSaver deduction and the employer contribution from their total earnings.
To set this up correctly, the base pay must be calculated so that when the 3.5% employer contribution is added, it equals the agreed total rate.
Formula: Divide the total rate by 1.035
Hourly rate example
If $29 per hour is inclusive of the employer KiwiSaver contribution:
$29 ÷ 1.035 = $28.02 (rounded from $28.019)
Check: $28.02 + 3.5% = $29.00 ✓
Salary example
If $75,000 is inclusive of the employer KiwiSaver contribution:
$75,000 ÷ 1.035 = $72,463.77
Check: $72,463.77 + 3.5% = $75,000 ✓
Holiday pay-inclusive rates (8%)
Some employment agreements specify that holiday pay is included within the hourly rate rather than paid separately when leave is taken. This is common for casual employees.
To calculate the base rate when 8% holiday pay is inclusive, use the same principle but with the holiday pay percentage.
Formula: Divide the total rate by 1.08
Hourly rate example
If $30 per hour is inclusive of 8% holiday pay:
$30 ÷ 1.08 = $27.78 (rounded from $27.777)
Check: $27.78 + 8% = $30.00 ✓
Salary example
If $60,000 is inclusive of 8% holiday pay:
$60,000 ÷ 1.08 = $55,555.56 (rounded from $55,555.555)
Check: $55,555.56 + 8% = $60,000 ✓
When both are inclusive
If a rate includes both the employer's KiwiSaver contribution and holiday pay, these must be calculated one after the other in the correct order, because KiwiSaver is calculated on gross earnings, which includes holiday pay.
Order of calculation:
Holiday pay = 8% of base rate
KiwiSaver = 3.5% of gross earnings (base + holiday pay)
Formula: Divide the total rate by 1.1178 (which is 1.08 × 1.035)
Example
$35 per hour inclusive of both 8% holiday pay and 3.5% employer KiwiSaver:
$35 ÷ 1.1178 = $31.31 (base rate)
Holiday pay: 8% of $31.31 = $2.50
Gross earnings: $31.31 + $2.50 = $33.81
Employer KiwiSaver: 3.5% of $33.81 = $1.18
Total: $31.31 + $2.50 + $1.18 = $34.99 ✓
Why can't the total rate just be the total rate?
Even if you and your employee agree on a total remuneration figure that includes the employer KiwiSaver contribution, that total still needs to be broken down into its component parts. The base rate of pay and the employer KiwiSaver contribution are different components - they're taxed differently and filed separately to IRD. So when you agree to a total amount inclusive of KiwiSaver, what you're actually agreeing to is a specific base rate of pay that, when the employer KiwiSaver contribution is added on top, brings you to the total.
Does your total package include accommodation?
If your employee's total remuneration includes an accommodation allowance or the provision of accommodation, you'll need to separate that out before calculating rates. Accommodation is not included as gross earnings for KiwiSaver purposes, which means the employer contribution should not be calculated on that portion of the package.
For example, if your employee is on a total package of $75,000 that includes $10,000 in accommodation, you would only use $65,000 as the agreed total rate when calculating the base rate.
This is particularly common in industries like agriculture, horticulture, and hospitality where accommodation is provided as part of the employment arrangement. If you're not sure whether your accommodation arrangement counts, it's worth checking with your accountant or an employment advisor.
Looking ahead to 2028
The employer contribution rate is set to increase again from 3.5% to 4% on 1 April 2028. If you use total remuneration arrangements, you'll face a decision then - whether to absorb the increase or renegotiate base rates with your employees. It may be worth considering whether total remuneration is still the right model for your business going forward.