If you have been made redundant, you may receive a lump sum payment from your employer. This payment is taxable in New Zealand — but it is taxed differently from your regular salary. Understanding how redundancy payments are taxed helps you verify that your employer has calculated the correct PAYE deduction.
Redundancy payments are taxed as "extra pay" under NZ law — your employer calculates a special tax rate based on your annual earnings to prevent the lump sum from being overtaxed. The redundancy payment is not exempt from income tax in NZ (unlike Australia). However, the extra pay method ensures you do not pay a disproportionately high rate. Your employer deducts PAYE at the calculated rate and pays it to IRD.
Are Redundancy Payments Taxable in NZ?
Yes. All redundancy payments are fully taxable as employment income in New Zealand. There is no tax exemption or reduced rate for genuine redundancy — unlike Australia, which has an exemption for the tax-free portion of genuine redundancy payments.
What is taxable:
- Redundancy compensation (the lump sum payout)
- Notice pay (pay in lieu of notice)
- Accrued but unused annual leave paid out on termination
What is not a redundancy payment for tax purposes:
- A true “ex gratia” gift (rare — IRD scrutinises these)
- Reimbursement of actual expenses
- Settlement payments under certain conditions (specialist advice needed)
How Extra Pay Tax Works
Redundancy payments are classified as “extra pay” under the PAYE rules. Extra pay includes:
- Redundancy compensation
- Bonuses
- Back pay
- Commissions paid as a lump sum
Because extra pay is paid in addition to regular income, simply applying your normal PAYE rate could over-tax or under-tax the payment. IRD requires employers to use the extra pay method.
Extra Pay Calculation Method
- Estimate your annualised income:
- Take your regular earnings for the pay period and extrapolate to a full year
- Add the extra pay to this estimated annual income
- Look up the appropriate tax rate from the PAYE tables for the total
- Calculate the tax on the extra pay by working backwards
Simplified example:
- Regular weekly pay: $1,200 (annualised: $62,400)
- Redundancy payment: $15,000
- Total: $77,400
- Tax rate on $77,400: 30% (based on PAYE table)
- Tax previously applicable at $62,400 annual income: 23.9%
- Extra pay tax: apply the differential rate to the $15,000 payment
In practice, your employer (or their payroll software) handles this calculation. The result is that the redundancy payment is taxed at a rate reflecting its contribution to your total annual income — not at a flat high rate.
PAYE on Annual Leave Payout
When you leave a job, outstanding annual leave is paid as a lump sum. This is taxed as extra pay separately from any redundancy payment:
| Component | Tax treatment |
|---|---|
| Annual leave payout | Extra pay — taxed using annualised method |
| Redundancy compensation | Extra pay — taxed using annualised method |
| Notice pay (in lieu) | Extra pay — taxed using annualised method |
Checking Your Redundancy PAYE Deduction
If you believe your employer deducted too much PAYE on your redundancy payment:
- Request a payslip or written breakdown of the PAYE calculation
- File your IR3 (income tax return) for the year — any overpaid PAYE will be refunded after IRD’s assessment
- You can also request an automatic assessment review via myIR if you received the payment in a year where you normally get an automatic assessment
KiwiSaver and Redundancy Pay
KiwiSaver contributions are not deducted from redundancy payments. The Inland Revenue treats redundancy payments as employment income but excludes them from KiwiSaver-liable earnings under the KiwiSaver Act 2006. Your employer does not deduct employee KiwiSaver contributions or make employer contributions on redundancy payments.
Redundancy and Working for Families
A large redundancy payment could affect your Working for Families (WFF) tax credit entitlements, since WFF is means-tested on family income. If a redundancy payment significantly increases your income for the year, your WFF payments may be overstated during the year and require repayment at year end.
Contact IRD or your tax agent to adjust your WFF expected income if you receive a large payment.
Frequently Asked Questions
Is there any redundancy payment exempt from tax in NZ?
No. Unlike Australia, New Zealand has no tax-free threshold for genuine redundancy payments. All redundancy compensation is taxable income, though the extra pay method prevents punitive over-taxation.
My employer just taxed my redundancy at my marginal rate — is that correct?
No — your employer should use the extra pay method, which typically results in a lower effective rate than your top marginal rate. Ask your employer to provide the calculation. If PAYE was over-deducted, you will receive a refund in your end-of-year assessment.
Do I need to declare my redundancy payment in my tax return?
If you receive an automatic income tax assessment, IRD should include it (reported by your employer via the payday filing). If you file an IR3 (e.g., you are self-employed or have other income), include the redundancy payment in your employment income.
Can I put my redundancy payment into KiwiSaver?
Yes — you can make a voluntary contribution of any amount to your KiwiSaver account directly. However, KiwiSaver employer and employee contributions are not deducted from the redundancy payment itself.