Redundancy Payment
A redundancy payment compensates an employee whose role is genuinely disestablished, typically set out in an employment agreement or negotiated at the time of restructuring. For tax purposes, IRD treats redundancy payments as 'extra pay' — the same lump-sum PAYE method used for bonuses — grossing up your annualised regular income with the payment to find a single flat tax rate, then applying that rate to the whole amount.
Redundancy payments are exempt from the ACC earner's levy and from KiwiSaver deductions (neither the employee's contribution nor the employer's), unlike ordinary salary or a bonus. Student loan repayments, however, still apply at 12% on the portion of combined income above the repayment threshold, the same as for regular extra pay.
Because a redundancy payment is usually made at or near the end of employment, IRD's annualisation approach uses your final regular pay periods (grossed up by the relevant weekly/fortnightly/four-weekly/monthly factor) rather than a full year of PAYE records, to estimate the correct marginal rate to apply.
How it works
Eligibility for a redundancy payment typically depends on your employment agreement having a redundancy compensation clause, since NZ law does not generally require employers to pay redundancy compensation unless it's contractually agreed or collectively bargained. Notice pay and any accrued but untaken annual leave are usually paid separately and may be taxed differently from the redundancy compensation itself, so a final pay can involve several different components taxed under different rules.
Tax-wise, the redundancy payment is grossed up against your annualised regular pay using your recent pay periods (rather than a full year of PAYE data, since redundancy typically comes near the end of employment) to find the single flat rate applied to the whole payment — the same extra pay mechanism used for bonuses. Because the payment often lands in an employee's final pay period, employers sometimes make a genuine effort to estimate the right rate but occasionally over- or under-deduct, which then washes up at year-end.
The exemptions from ACC earner's levy and KiwiSaver deductions are a genuine difference from a bonus of the same size, meaning a redundancy payment nets out slightly more favourably than an equivalent bonus once those deductions are accounted for. Student loan repayments are the exception that still applies in full — the standard 12% repayment rate continues to bite on the portion of combined income above the repayment threshold, the same as it would on a bonus.
Frequently asked questions
Is redundancy pay taxed differently from being made redundant with working notice?
The redundancy compensation itself is taxed under the extra pay lump-sum rules, while notice pay (whether worked or paid in lieu) is generally taxed as ordinary salary or wages under normal PAYE, so the two components can be treated differently on the same final payslip.
Do I pay ACC earner's levy or KiwiSaver contributions on a redundancy payment?
No — redundancy payments are specifically exempt from both the ACC earner's levy and KiwiSaver deductions (employee and employer), unlike a bonus or other extra pay, though student loan repayments still apply.
Is an employer legally required to pay redundancy compensation in New Zealand?
Not automatically — redundancy compensation is generally only payable if it's provided for in the employment agreement or a collective agreement, unlike notice periods and final pay entitlements, which are required regardless.
Related Terms
Extra Pay
Extra pay is IRD's category for one-off payments outside your regular salary or wages — bonuses, backpay, retiring or redundancy payments, cashed-up annual leave, and similar lump sums.
Student Loan
New Zealand student loans are provided by StudyLink to fund tertiary education, covering tuition fees, course-related costs, and living expenses.
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