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Taxing lump sum payments

Lump sum payments (also called extra pays) include:

  • annual or special bonuses
  • cashed-in annual leave
  • retiring or redundancy payments
  • payments for accepting restrictive covenants
  • exit inducement payments
  • gratuities
  • back pay, or
  • lump sum holiday pay.

Overtime or any regular payments are not lump sum payments.

When calculating PAYE on lump sum payments, different calculations are used depending on whether the income comes from:

Regardless of income source, redundancy payments and retiring allowances aren't subject to ACC earners' levy.

Note

To calculate tax on lump sums paid to employees on:

  • NSW, CAE or EDW tax codes - use the primary employment method, not their ordinary flat rates
  • a special tax code - use the rate specified on their STC certificate.

If the lump sum has PAYE applied using the lowest rate, tick the box on the Employer monthly schedule (IR348) to show this.

 Lump sum payments from primary employment

To calculate the PAYE we need to calculate the grossed-up annual value of the employee's income and add that to the extra pay amount.

To do this:

  1. Add up the PAYE income payments for the four weeks ending on the date of the extra payment (whether this is the normal pay cycle or not).
  2. Multiply by 13.
Total of lump sum payment and grossed-up annual value of employee's income for previous four weeks PAYE rate (including 1.39% ACC levy) PAYE rate for redundancy or retiring payments
$14,000 or less
11.89%
10.50%
from $14,001 to $48,000
18.89%
17.50%
from $48,001 to $70,000
31.39%
30.00%
from $70,001 to $122,063
34.39%
33.00%
Note

$122,063 is the ACC levy maximum for the 2017 tax year.

If the total lump sum payment and the grossed-up annual value of the employee's income for the previous year exceeds $122,063, use the following examples:

Example
Grossed-up annual value of employee's income for previous four weeks PAYE rate on the lump sum PAYE rate for redundancy or retiring payments
less than $122,063
34.39% up to $122,063
33 % on the remainder
33%
$122,063 or more
33 %
33%

Jane uses the M tax code. Jane's employer wants to pay her a one-off bonus of $20,000. In the last four weeks Jane has earned $9,000.

Applying the calculation above, Jane's employer can work out the amount of PAYE on her bonus.

Annualised income ($9,000 x 13) $117,000
Plus the amount of extra pay $20,0000
Total income $137,000

The annualised income plus the low threshold amount is below the threshold of $122,063. But when the extra pay is added, the annual income estimate exceeds $122,063, so the ACC earner levy should only be applied to the part of the extra pay between $117,000 and $122,063.

Income thresholds for this bonus Income amount PAYE rate
less than $122,063
$5,063
34.39%
$122,063 or more
$14,937
33%
Note

You can also apply PAYE at 34.39% when the employee asks you to use this rate.

Example

You're going to pay a bonus payment of $400 to one of your employees. The employee's gross earnings for the last four weeks were $2,500. The calculation will look like this:

Annualised income (13 x $2,500)
$32,500
Plus the bonus payment
$400
Total
$32,900

In this example, the income level is between $14,000 and $48,000 so the PAYE rate applied to the bonus payment is 18.89%.

Read examples where the lump sum isn't paid with a gross salary or wage payment

Student loan repayments and KiwiSaver

If the employee uses a student loan tax code (M SL, ME SL) then you'll also have to deduct student loan repayments. Add any gross salary or wage payments for the same period to the gross lump sum amount and deduct the pay period threshold, eg, $367 a week. The remaining amount will have student loan deductions made at the standard deduction rate of 12 cents in the dollar.

Example

You're going to pay a bonus payment of $1,000 to one of your employees. The employee's gross earnings are $644 weekly. The calculation will look like this:

Weekly gross wages
$564
Plus the bonus payment
$1,000
Total payment for the week
$1,564
Minus weekly pay period threshold
$367
Total
$1,197
Student loan deductions (12% of $1,197)
$143.64

If the employee is a KiwiSaver member then you'll need to deduct contributions from some lump sum payments.

Find out more about making KiwiSaver deductions

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 Lump sum payments from secondary employment

To calculate the amount of PAYE on extra pay for employees using a secondary tax code, first we need an annual income estimate. This is calculated as:

extra pay plus annualised income plus low threshold amount (from table below)

Annualised income is calculated by adding up the PAYE income payments for the four weeks ending on the date of the extra payment (whether this is the normal pay cycle or not) and multiplying it by 13. The amount of the extra pay is not included in this total.

Low threshold amounts

Tax code Low threshold amount
SB
$0
S
$14,001
SH
$48,001
ST
$70,001

Once you have the annual income estimate, use it to find the corresponding tax rate in the tables below.

Annual income estimate (from the calculation above) PAYE rate including 1.39% ACC earners' levy PAYE rate for redundancy or retiring payment lump sums
$0 - $14,000
11.89%
10.50%
$14,001 - $48,000
18.89%
17.50%
$48,001 - $70,000
31.39%
30%
$70,000 - $122,063
34.39%
33%
Note

$122,063 is the ACC levy maximum for the 2017 tax year.

If the annual income estimate is more than $122,063 then the amount of PAYE on the full extra pay should be calculated using the following table examples.

If the annualised income plus the low threshold amount is... the PAYE rate on the lump sum is If the payment is a redundancy or retiring payment, then the PAYE rate is
less than $122,063
34.39%
33%
$122,063 or more
33%
33%
Example

Jane has a second job and uses the ST tax code. Jane's secondary employer wants to pay her a one-off bonus of $20,000. In the last four weeks Jane has earned $2,695 from her second job.

Applying the calculation in the table above, Jane's employer can work out the amount of PAYE on her bonus.

Annualised income (13 x $2,695) $35,035
Plus low threshold amount (based on ST, Jane's secondary code from the above table) $70,001
Total $105,036
Plus the amount of the extra pay $20,000
Annual income $125,036

The annualised income plus the low threshold amount is below the threshold of $122,063. But when the extra pay is added, the annual income estimate exceeds $122,063, so the ACC earner levy should only be applied to the part of the extra pay between $105,036 and $122,063.

In the following calculation the PAYE has been calculated on the full bonus at 34.39%, and then the over-deducted ACC has been subtracted.

ACC on extra pay ($20,000 x 34.39%)
$6,878
Annual income minus ACC threshold ($125,036 - $122,063
$2,973
$2,973 x 1.39%
$41.32
$6,878 - $41.32
$6,836.68
PAYE on extra pay
$6,836.68

Read examples where the lump sum isn't paid with a gross salary or wage payment

Student loan repayments and KiwiSaver

If the employee uses a student loan tax code (S SL, ST SL etc) then you'll also have to deduct student loan repayments. Student loan deductions are made at the standard deduction rate of 12 cents in the dollar from the first dollar of income.

In the above example student loan is calculated as shown in the table below.

Extra pay
$20,000
$20,000 x 12%
$2,400
Student loan deductions on extra pay
$2,400

If the employee is a KiwiSaver member then you'll need to deduct contributions from some lump sum payments

Find out more about making KiwiSaver deductions

 Lump sum payments made outside the standard pay period

A lump sum can be paid to an employee in the employer's usual pay cycle (as demonstrated above) , or on another date outside this cycle. This can happen for a number of reasons including termination or redundancy.

When a payment is made outside the normal pay cycle, the 4-week period ends on the day the payment is made.

Read the examples below.

Example

You're going to pay a redundancy payment of $7,500 to an employee with an MSL tax code with their normal pay on 5 October 2016. The employee's gross earnings are $1,128 fortnightly. They received a one-off bonus of $1,000 on 5 September 2016.

The calculation will look like this:

Fortnightly gross wages $1,128
Four-weekly gross wages $2,256
Multiplied by 13 $29,328
Plus the bonus payment $7,500
Annualised income plus lump sum $36,828
Tax rate 17.50%

The student loan deduction would be calculated as follows:

Fortnightly gross income
$1,128
Plus lump sum
$7,500
Total payment for the fortnight
$8,628
Minus weekly pay period threshold
$734
Total
$7,894
Student loan deductions (12% of $7,894)
$947.28
Example

You're going to pay a redundancy payment of $7,500 to an employee with an MSL tax code with their normal pay on 5 October 2016. The employee's gross earnings are $1,128 fortnightly. They received a one-off bonus of $1,000 on 5 September 2016. The employee has asked that the payment be made as soon as possible. You've agreed to do this and paid the lump sum on 28 September 2016, bringing the $1,000 bonus of 5 September 2016 into the 4-week period.

The calculation would look like this:

Fortnightly gross wages
$1,128
Four-weekly gross including $1,000 bonus
$3,256
Multiplied by 13
$42,328
Plus the bonus payment
$7,500
Annualised income plus lump sum
$49,828

Tax rate

30.00%

As the lump sum is not associated with a regular pay period, no regular student loan repayment threshold applies, and student loan deductions are calculated at 12% of the lump sum

Lump sum $7,500
Student loan deductions (12% of $7,500) $900.00