Redundancy and Restructure Payments: How They're Taxed in NZ
How redundancy payments are taxed in New Zealand, including PAYE treatment, extra pay rules, and what to expect on your final payslip.
Published 10 April 2026 · Reviewed by NZ Tax Tools Editorial Desk
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
- Take your gross earnings for the last four weeks (regular pay only, excluding previous extra pays)
- Annualise that figure — multiply by 13 (for four-weekly) to estimate yearly income
- Add the extra pay to the annualised income
- Calculate full-year tax on the combined total
- Calculate full-year tax on the annualised income alone (without the extra pay)
- The difference is the PAYE deducted from the redundancy payment
This method aims to tax the lump sum at your marginal rate, but it can over-withhold if your actual annual income is 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 — Last four weeks of gross pay: $2,884.62 × 2 fortnights = $5,769.24
Step 2 — Annualise: $5,769.24 × 13 = $75,000
Step 3 — Add extra pay: $75,000 + $20,000 = $95,000
Step 4 — Tax on $95,000:
| Bracket | Calculation | Tax |
|---|---|---|
| $0 – $15,600 | × 10.5% | $1,638 |
| $15,601 – $53,500 | × 17.5% | $6,633 |
| $53,501 – $78,100 | × 30% | $7,380 |
| $78,101 – $95,000 | × 33% | $5,577 |
| Total | $21,228 |
Step 5 — Tax on $75,000 (without extra pay):
| Bracket | Calculation | Tax |
|---|---|---|
| $0 – $15,600 | × 10.5% | $1,638 |
| $15,601 – $53,500 | × 17.5% | $6,633 |
| $53,501 – $75,000 | × 30% | $6,450 |
| Total | $14,721 |
Step 6 — PAYE on the redundancy payment: $21,228 − $14,721 = $6,507
James receives $13,493 after tax from his $20,000 redundancy payment (effective rate: 32.5%).
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:
| Component | Tax treatment |
|---|---|
| Redundancy payment | Extra pay — PAYE as above |
| Pay in lieu of notice | Extra pay — PAYE as above |
| Unused annual leave | Extra pay — PAYE as above |
| Unused sick leave payout (if contractual) | Extra pay — PAYE as above |
| Retirement fund/KiwiSaver employer contributions | Normal employer contribution rules |
| Outplacement services | Generally not taxable (provided by employer to third party) |
All cash components 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
Redundancy payments are subject to ACC earners’ levy (1.60% for 2025-26), just like regular employment income. This is deducted automatically by your employer as part of payroll.
Key Takeaways
- Redundancy payments are fully taxable in NZ — there’s no tax-free component
- PAYE is calculated using the extra pay method, which can result in higher initial withholding
- 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.