Holiday Pay and Annual Leave: How They're Taxed in New Zealand

Under the Holidays Act 2003, every New Zealand employee accrues paid annual leave and is entitled to public holiday pay. From a tax perspective, holiday pay is employment income — but the way PAYE is calculated depends on whether it is paid as part of a regular pay cycle or as a lump sum on final pay. This article explains each scenario for the 2025-26 tax year and walks through worked examples in NZD.

The Three Ways Holiday Pay Is Paid

Scenario	How it’s paid	PAYE treatment
Annual leave taken during employment	Paid at your normal rate for the period of leave	Standard PAYE on regular wages
Public holiday worked	Time-and-a-half plus an alternative day	Standard PAYE on the higher gross
8% holiday pay on termination	Lump sum of 8% of gross earnings since last anniversary	Extra pay rules (flat marginal rate)
8% “pay-as-you-go” (fixed-term/casual)	8% added to each regular pay	Standard PAYE on the combined gross

Annual Leave Taken During Employment

When you take paid annual leave, your employer pays you at the greater of your ordinary weekly pay or average weekly earnings over the last 52 weeks. This becomes your gross pay for that period and is taxed exactly like any other week of wages.

Deductions applied:

• Income tax (PAYE) at your tax code’s marginal rate
• ACC earner’s levy (1.67% on earnings up to $152,790 in 2025-26)
• KiwiSaver employee contributions (if enrolled)
• Student loan repayments (if applicable)

Worked example: one week of annual leave on a $70,000 salary

Item	Amount
Ordinary weekly pay (gross)	$1,346.15
PAYE (tax code M)	approx. $245.05
ACC earner’s levy (1.67%)	$22.48
KiwiSaver 3%	$40.38
Take-home pay	approx. $1,038.24

There is no tax penalty for taking leave — the deductions are identical to any regular working week.

Public Holiday Pay

If you work on a public holiday (for example, Waitangi Day, ANZAC Day, or Labour Day), you are entitled to:

• At least time-and-a-half for the hours worked, and
• An alternative holiday (“day in lieu”) if the day would otherwise have been a working day for you

Both the time-and-a-half hours and the alternative day (when later taken) are taxed as ordinary employment income. A public holiday pay bump does not use “extra pay” rules — it’s simply more gross for the period.

Worked example: working Waitangi Day on a $30/hour job

Item	Amount
8 hours at time-and-a-half ($45/hr)	$360.00
Plus 8 hours regular work (rest of week)	$960.00
Weekly gross	$1,320.00
PAYE (M code, approx.)	$240.00
ACC earner’s levy	$22.04

8% Holiday Pay on Final Pay (the Extra Pay Rules)

When you leave a job, any annual leave accrued but not taken is paid out as 8% of gross earnings since your last leave anniversary. Under IRD rules, this lump sum is classified as an “extra pay” — the same category as bonuses, backpay, and redundancy.

How extra pay PAYE works

1. Calculate your annualised regular income (the ordinary 4-week pay × 13).
2. Add the lump sum.
3. Apply the marginal tax rate for the bracket the lump sum lands in — as a flat rate on the entire lump sum.

The 2025-26 extra pay brackets (matching the income tax brackets):

Annualised income band	Extra pay rate
Up to $15,600	10.5%
$15,601 – $53,500	17.5%
$53,501 – $78,100	30%
$78,101 – $180,000	33%
Over $180,000	39%

Worked example: final pay on a $65,000 salary

Say you resign after six months and have accrued $2,600 of 8% holiday pay. Your normal 4-week pay cycle is $5,000 → annualised at $65,000. The lump sum sits entirely in the 30% bracket.

Item	Amount
Gross lump sum (8% holiday pay)	$2,600.00
Extra pay PAYE (30%)	$780.00
ACC earner’s levy (1.67%)	$43.42
KiwiSaver 3%	$78.00
Student loan (if applicable, 12%)	$312.00
Net payout (without student loan)	approx. $1,698.58

Note: KiwiSaver and student loan are still deducted from extra pay.

8% “Pay-as-You-Go” Holiday Pay

For genuinely casual employees or fixed-term contracts of less than 12 months, the employer may pay 8% holiday pay on top of each regular pay instead of accruing leave. In this case:

• The 8% is added to gross wages each pay period.
• Standard PAYE applies — not extra pay rules.
• KiwiSaver and student loan deductions apply to the combined gross.

This is not available for ordinary permanent employees — using PAYG for a permanent employee breaches the Holidays Act.

Common Mistakes on Final Pay

1. Thinking the 8% lump sum is taxed at 39% automatically. It is taxed at the marginal rate for your annualised income band — most workers pay 17.5% or 30%, not 39%.
2. Forgetting KiwiSaver on final pay. Employee and employer KiwiSaver contributions apply to 8% holiday pay.
3. Expecting ACC levy to stop at termination. ACC earner’s levy applies to all PAYE income in the year up to the $152,790 cap.
4. Missing the alternative holiday payout. Unused alternative days are paid out at your ordinary daily rate on termination and taxed as ordinary wages.

Key Takeaways

• Annual leave taken during employment is taxed exactly like regular wages.
• Public holiday time-and-a-half is taxed at standard PAYE — no special rules.
• 8% holiday pay on termination is taxed as “extra pay” at the marginal rate of your annualised income band.
• KiwiSaver, ACC earner’s levy, and student loan all apply to holiday pay.
• The “pay-as-you-go” 8% only applies to casuals and short fixed-term contracts.

To estimate your take-home on a regular week or on a final pay including holiday pay, use our PAYE calculator or the take-home pay calculator. For specific extra-pay scenarios like redundancy, see our bonus and extra pay guide.