Holiday pay (annual leave entitlement) is taxed as ordinary income in New Zealand — PAYE is deducted in the same way as wages. However, the rate at which leave is taxed when paid out (especially at termination) depends on how it is calculated and when it is paid.
Holiday pay is taxed as ordinary PAYE income — it is not concessionally taxed like redundancy. When you take leave during employment, PAYE is deducted from your leave pay at the same rate as your regular wages. If your employer pays out accrued leave at termination (or as a lump sum), PAYE is deducted using the lump sum withholding rate (which accounts for the one-off nature of the payment). KiwiSaver contributions apply to holiday pay.
What Is Holiday Pay in NZ?
Under the Holidays Act 2003, employees are entitled to four weeks of paid annual leave per year after 12 months of employment. The Holidays Act requires employers to pay the higher of:
- Ordinary weekly pay (OWP) — what the employee normally earns in a week
- Average weekly earnings (AWE) — total gross earnings in the prior 52 weeks, divided by 52
This distinction matters for tax because leave calculated on AWE may include irregular payments (overtime, commissions, bonuses) and produce different weekly amounts than OWP.
Tax on Leave Taken During Employment
When an employee takes annual leave while still employed:
- The leave pay is treated as ordinary wages
- PAYE is deducted at the same rate as regular wages
- KiwiSaver employee and employer contributions apply
- ESCT (Employer Superannuation Contribution Tax) applies to the employer’s KiwiSaver contribution
There is nothing unusual about the tax treatment — the leave payment replaces the employee’s ordinary pay for the period they are on leave.
Tax on Leave Paid Out at Termination
When employment ends, any unused annual leave is paid out as a lump sum. The tax treatment:
| Situation | Tax treatment |
|---|---|
| Leave paid during employment (taken as leave) | Ordinary PAYE rates |
| Leave paid out at termination (unused leave) | Lump sum withholding rate |
| Sick leave payout at termination | Lump sum withholding rate |
| Long service leave paid in a lump sum | Lump sum withholding rate |
Lump Sum Withholding Rate
IRD specifies lump sum withholding rates to be applied to one-off payments. The rate depends on the employee’s annual income estimate and the size of the lump sum. Payroll software automatically calculates the correct withholding rate.
The lump sum rates ensure that the one-off payment does not cause the employee to be under-withheld or over-withheld — a standard payment might push the employee into a higher bracket if taxed using the weekly pay method.
How Holiday Pay Differs From Redundancy
| Feature | Holiday pay | Redundancy compensation |
|---|---|---|
| Concessional tax rate | No | No (taxed as income) |
| Lump sum treatment | At termination | Standard lump sum rates |
| Subject to KiwiSaver | Yes | Generally yes |
| IRD treatment | Ordinary income | Ordinary income |
In NZ, neither holiday pay nor redundancy compensation has a special tax-free threshold or concessional rate (unlike some other countries). Both are taxed as ordinary income. See Redundancy Tax NZ.
KiwiSaver on Holiday Pay
KiwiSaver employee and employer contributions apply to holiday pay paid during employment in the same way as regular wages:
- Employee contributions: at elected rate (3%, 4%, 6%, 8%, or 10%)
- Employer contributions: at minimum 3% (or higher if agreed)
For leave paid out at termination, KiwiSaver contributions are not required — termination payouts are treated similarly to redundancy for KiwiSaver purposes.
Holidays Act 2003 Compliance Issues
The Holidays Act has been notoriously difficult to implement correctly, leading to widespread underpayments of holiday pay by NZ employers. The issues arise from:
- Irregular pay — variable hours workers, shift workers, commission earners
- OWP vs AWE calculation — employers sometimes pay the lesser amount when they should pay the higher
- Inclusion of irregular payments — overtime, allowances, and irregular bonuses may need to be included in AWE
IRD and MBIE have pursued employers for back-pay obligations. Employees who suspect underpayment can raise a wage and time dispute with MBIE’s Labour Inspectorate.
Frequently Asked Questions
My employer paid out my annual leave when I was made redundant. Is there tax on this?
Yes — unused annual leave paid at termination is taxable income, with PAYE deducted. It is not tax-free. The lump sum withholding rate will be applied by your employer’s payroll.
Does holiday pay count as income for Working for Families?
Yes — holiday pay is income and counts towards your family scheme income for WFF purposes.
I’m casual and my employer pays me holiday pay as 8% on each pay. Is this taxed the same way?
Yes — the 8% holiday pay loading on each pay is taxed as ordinary PAYE income alongside your regular wages. It is a way of complying with the Holidays Act for irregular workers rather than accruing leave separately.
I work reduced hours after parental leave. How is my holiday pay calculated?
Your OWP reflects your current reduced hours. Your AWE reflects the prior 52 weeks — which may include periods of higher earnings. Your employer must pay the higher of the two. This often means AWE produces a higher entitlement for people returning from parental leave at reduced hours.