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There have been changes made to the way employers can calculate the tax to be deducted from holiday pay when it is paid as a lump sum to an employee before they take their leave.

New Zealand employers can now opt to pay holiday pay as a lump sum extra pay or if the lump sum was paid to the employee in their usual pay cycle, tax can be calculated over the pay periods that their holiday covers. This 2nd approach is referred to as the “alternative approach”.

If the holiday is paid instead of the employee’s regular pay when they take annual leave or as part of their regular pay at the rate of 8% of the gross earnings, you can use the usual PAYE tables to calculate the correct amount of PAYE, student loan payments and Kiwi Saver deductions (including employer superannuation tax).

If, on the other hand, the holiday pay is paid as a lump sum in addition to the employee’s regular pay it should be taxed as an “extra pay”.

This includes the situation where the holiday pay is paid as a lump sum before the holiday is taken (paid in advance) or the remaining balance of the employees leave entitlement is paid as a lump sum at the end of their employment.

Incidentally, the same options apply to a number of lump-sum payments or extra pays including:

  • annual or special bonuses
  • cashed-in annual leave
  • retiring or redundancy payments
  • payments for accepting restrictive covenants
  • exit inducement payments
  • gratuities
  • back pay
  • back paid holiday pay
  • lump sum holiday pay
  • employee share scheme benefits

Different calculations apply depending on if the income is the employee’s primary or secondary source of employment.

Employees can also request that higher rates of tax be applied to lump sums. They might prefer this option if they have another job or have a rental property that is positively geared and therefore resulting in a tax headache at the end of the year.

New Zealand payroll calculations are quite different from Australia. Contact us for a quote on our New Zealand payroll services.

The information in this article is indicative of NZ tax rules and changes and not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.