Redundancy and Restructure Payments: How They're Taxed in NZ

How Redundancy Is Taxed in New Zealand

In New Zealand, redundancy payments are fully taxable as employment income. There’s no tax-free threshold or special concessional rate — unlike Australia, which has tax-free components for genuine redundancy.

Your redundancy payment appears on your final payslip and is included in your employment information (the replacement for the old IR348) that your employer files with IRD.

Extra Pay PAYE Rules

Redundancy payments are classified as extra pay (also called lump-sum payments). IRD uses a specific method to calculate PAYE on extra pays that differs from regular salary deductions.

How the calculation works

IRD’s official method (set out in the Employer’s guide — IR335, “Lump sum payments for main employment tax codes”) works out a single flat marginal rate and applies it directly to the redundancy payment — it does not run two separate full-year tax calculations:

1. Annualise your recent pay. Because redundancy is paid when employment ends, the employer adds your last 2 pay periods of regular gross pay (excluding the redundancy itself) and multiplies by a factor based on how often you’re paid: ×26 if weekly, ×13 if fortnightly, ×6.5 if 4-weekly, ×6 if monthly.
2. Add the redundancy payment to that annualised figure to get a total.
3. Look up the PAYE rate for the bracket that total falls into. Because redundancy payments are exempt from ACC earners’ levy (see below), the employer uses the rate excluding the earner’s levy: 10.5% / 17.5% / 30% / 33% / 39% for the $15,600 / $53,500 / $78,100 / $180,000 brackets.
4. Apply that single flat rate to the redundancy payment only (not to the annualised total) — that’s the PAYE to deduct.

This taxes the lump sum at your marginal rate on the annualised-plus-redundancy total, but it can over-withhold if your actual annual income ends up lower than the annualised estimate — for example, if you only worked part of the year before being made redundant.

Worked Example

James earns $75,000 per year ($2,884.62 per fortnight). After 5 years, he’s made redundant in October and receives a $20,000 redundancy payment.

Step 1 — Annualise (last 2 pay periods × 13, fortnightly): $2,884.62 × 2 fortnights = $5,769.24 $5,769.24 × 13 = $75,000

Step 2 — Add the redundancy payment: $75,000 + $20,000 = $95,000

Step 3 — Find the rate for $95,000 (excluding ACC levy, since redundancy is levy-exempt):

$95,000 falls in the $78,101–$180,000 band, so the rate is 33%.

Step 4 — Apply the rate to the redundancy payment only: $20,000 × 33% = $6,600

James receives $13,400 after tax from his $20,000 redundancy payment (effective rate: exactly 33% — the marginal rate for his combined annualised income).

Note: Because James was made redundant in October (having only worked ~4 months of the tax year), his actual annual income will be lower than $95,000. He’ll likely receive a tax refund after his end-of-year assessment.

What’s Included in a Redundancy Package

Redundancy packages often include several components, each with their own tax treatment:

All cash components (except KiwiSaver, which doesn’t apply) are taxed as extra pays. There’s no special treatment for any of them.

Notice Period vs Lump Sum

Your employer may offer to pay out your notice period as a lump sum rather than having you work through it. Either way, the tax treatment is the same — the payment is taxable employment income.

However, there’s a practical difference:

• Working through notice: PAYE deducted at your normal rate each pay period
• Lump-sum payment in lieu: PAYE calculated using the extra pay method, which may result in higher withholding (refunded later if over-withheld)

ACC Levies and KiwiSaver — Both Exempt

Unlike regular salary and wages, redundancy payments are exempt from ACC earners’ levy. IRD’s guidance is explicit: “The ACC earners’ levy does not apply to redundancy payments.” This is also why the worked example above uses the levy-excluding PAYE rate (33%) rather than the levy-inclusive rate (34.75%) to tax James’s payment.

Redundancy payments are also excluded from KiwiSaver contributions — for both the employee and employer side. The KiwiSaver Act’s definition of “salary and wages” specifically excludes redundancy payments, so neither your 3%+ employee contribution nor your employer’s matching contribution is deducted from a redundancy payment.

Sources: IRD — Taxing employee redundancy and IRD — Redundancy and KiwiSaver.

Key Takeaways

• Redundancy payments are fully taxable in NZ — there’s no tax-free component
• PAYE is calculated using the extra pay method: annualise recent pay, add the redundancy amount, and apply the single flat rate for that income band directly to the redundancy payment
• Redundancy payments are exempt from ACC earners’ levy and excluded from KiwiSaver contributions (employee and employer) — unlike regular pay
• If you worked only part of the year, you’ll likely get a refund after your end-of-year assessment
• All cash components (redundancy, notice pay, leave payouts) are taxed the same way
• Check your myIR account after 31 March for your automatic assessment

Use the redundancy tax calculator to estimate your after-tax redundancy payment.