What IRD says
- A redundancy payment is taxable income. IRD says your employer should deduct the tax and pay it on your behalf.
- IRD's employer guidance says redundancy payments are taxed at the lump sum rate and that the ACC earners' levy does not apply to them.
- Student loan repayments: IRD says your employer should take student loan repayments from a redundancy payment. On a secondary tax code, or a main tax code with pay above the repayment threshold, repayments come out of the whole payment; on a main code below the threshold, only from the part above it.
- At the end of the tax year, IRD works out whether you paid the right amount, either through an automatic assessment or an IR3 return. You might get a refund or owe more.
What 'lump sum rate' means in practice
IRD's employer guide (IR335) says that for main-job employees the employer adds your annualised income to the lump sum, and that total sets the PAYE rate applied to the lump sum. That can mean your payout is taxed at a higher rate than your normal pay. Rates and thresholds change, so check the current IR335 at ird.govt.nz or ask your payroll team for the calculation.
Illustration only: if you normally earn $80,000 a year and get $20,000 redundancy, the rate on the payment is worked out as if your income were around $100,000, which can mean a higher rate than your usual pay. Over the full tax year your actual income may be much lower, especially if you're unemployed for several months, so IRD may refund some of the tax.
The rest of your final pay
| Part of final pay | Usual treatment |
|---|---|
| Wages, notice pay, annual leave payout | PAYE as normal salary/wages. Employers may treat leave payout as an extra pay, so check your payslip. |
| Redundancy compensation | Lump sum rate; no ACC earners' levy. |
| KiwiSaver | IRD says KiwiSaver contributions are not deducted from a redundancy payment, and your regular deductions stop when employment ends. IRD's KiwiSaver employer guidance leaves redundancy payments out of the pay that compulsory employer contributions are based on, so don't expect an employer contribution on the payout. Confirm with payroll. |
| Student loan | Deducted from the payment (whole amount, or only the part over the threshold if you're on a main code below it). |
Settlement payments are different
If you sign a settlement and part of the money is for hurt and humiliation (a personal grievance remedy) instead of redundancy compensation, it can be taxed differently. I couldn't verify IRD's current position on this, so ask the employer how each part is described and get it in writing, then check with IRD or an accountant before you sign.
Getting tax back
- Keep your final payslip and your IR3/IR330 details. Log in to myIR.
- After 31 March, IRD will assess your income for the year or ask you to file an IR3. If you have lost your job and had only part of a year's income, you may be due a refund.
- If you owe tax and can't pay, contact IRD early. Instalment arrangements are available.
- If you start a new job, give them your correct tax code. A wrong code can mean over- or under-paying.
Sources
- IRD: Taxing employee redundancy (employers) (opens in a new tab)
- IRD: Redundancy and income tax (opens in a new tab)
- IRD: Redundancy and student loans (opens in a new tab)
- IRD Tax Policy: Redundancy payment rebate (historical) (opens in a new tab)
General information only. Confirm with the agency for your situation. Spotted something out of date? Email help@unemployed.nz.