Tax on a redundancy lump sum.
Tax on redundancy
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Effective rate on lump sum
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Net redundancy
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There is no tax-free redundancy in New Zealand
People often arrive at this page expecting a tax-free slice, the way some countries exempt the first few thousand dollars of a redundancy payout. New Zealand removed its redundancy tax rebate back in 2011. Today a redundancy payment is treated as an extra pay, a lump sum that sits on top of the income you have already earned that year, and it is taxed at the marginal rates that apply to that stacked amount. The practical consequence is that a redundancy cheque can be taxed harder than your regular salary, because the last dollars of it are pushed into a higher band.
Stacking the lump sum on top of your salary
The calculator works out the tax the honest way: it calculates the income tax on your salary plus the lump sum, then subtracts the tax on your salary alone. What is left is the tax attributable to the redundancy itself. Because New Zealand’s brackets are 10.5 percent up to $15,600, 17.5 percent to $53,500, 30 percent to $78,100, 33 percent to $180,000, and 39 percent above that, where your salary already sits decides which bands the lump sum falls into.
A $30,000 payout on a $75,000 salary
Say you earn $75,000 and receive a $30,000 redundancy payment. Your salary already uses up the lower bands and reaches into the 30 percent band. The first $3,100 of the lump sum fills the rest of the 30 percent band up to $78,100, and the remaining $26,900 is taxed at 33 percent. The figures land like this.
| Slice of the lump sum | Rate | Tax |
|---|---|---|
| $75,000 to $78,100 ($3,100) | 30% | $930 |
| $78,100 to $105,000 ($26,900) | 33% | $8,877 |
| Tax on the $30,000 lump | 32.7% effective | $9,807 |
| Net redundancy in hand | $20,193 |
So the effective rate on the redundancy is 32.7 percent, higher than the 30 percent band the salary alone tops out at, purely because part of the lump crossed into the 33 percent band. The chart shows the split.
The ACC quirk and the PAYE code trap
Two things catch people out. First, the ACC earner levy is not charged on a genuine redundancy payment, which is why this tool does not deduct it, but the levy at 1.67 percent does apply to your final pay of salary and any holiday pay paid out, so your last payslip is not entirely levy-free. Second, employers must deduct PAYE on the lump sum using an extra-pay rate, and the prescribed rate can differ from the true marginal rate you would calculate here. If too much is deducted you get it back when you file or through an automatic year-end assessment; if too little is taken you will owe the gap. The smart move is to set aside the difference rather than spend the whole net figure, because a redundancy often lands in a year when your total income is unusually shaped.
Is the timing of the payment worth thinking about?
It can be. Because the tax depends on your total income for the tax year, a redundancy paid in a year when you also worked several months is taxed against that combined income. If a payment straddles 31 March, when it is actually paid can change which year’s income it stacks onto. This is rarely worth engineering, but if your redundancy is large and your two tax years differ sharply in income, it is worth a quick word with an accountant before payday.
What about pay in lieu of notice and unused leave?
Pay in lieu of notice and any unused annual leave paid out on termination are also taxable, but they are ordinary income subject to PAYE and the ACC levy, not extra-pay redundancy. Only the genuine redundancy compensation, the amount paid because the role itself is gone, is treated as the lump sum this calculator models. Keep the components separate when you read your final pay, because they are taxed on different bases.