Make sure you use the right tax codes if you get other payments from your employer at the same time as you’re getting your paid parental leave payments.
That way, you should pay most of your tax during the year.
You could end up with an end-of-year tax bill if you do not use a secondary tax code on your smaller source of income.
Paying tax (PAYE) during the year
Paid parental leave payments are taxable just like a salary or wage. That means we deduct tax (called PAYE) from each payment before you get paid.
The amount of PAYE deducted depends on your tax code.
At the end of the tax year (31 March), when we assess your income tax, we'll calculate how much PAYE you've had deducted and compare this to the tax you need to pay.
If your PAYE does not cover the tax you need to pay, then you’ll have a tax bill to pay. And if you’ve had too much PAYE deducted, you'll get a refund.
What happens at the end of the tax year
PAYE helps you pay your tax a bit at a time during the year, so you will not have to pay a year’s worth of tax all at once.
Other payments from your employer
Many other payments you get from your employer (over and above your salary or wage) are taxable. There are 2 types of taxable payments you might receive while you’re on parental leave.
Payments taxed under the regular PAYE rules
Examples of this type of payment include:
- top-up payments
- holiday pay
- salary or wages from working keeping in touch hours.
If you get any of these payments at the same time as you’re getting your paid parental leave payments, you’ll need a secondary tax code.
You’ll use a main tax code (which is one that starts with ‘M’ like M, ME, MSL) for your main source of income.
Your main tax code deducts PAYE using the progressive rates of tax.
And you’ll use a secondary tax code (one that starts with ‘S’) for your smaller ‘secondary’ source of income.
Your secondary tax code deducts PAYE at the top rate of tax applying to your total income for the year. That’s because your secondary income comes in ‘on top’ of your main income.
If you use 2 main tax codes at the same time, you may get an end-of-year tax bill.
Lump sum payments
Examples of this type of payment include:
- performance or incentive-based payments such as commission and bonuses
- redundancy payments
- maternity grants.
If you get any of these payments at the same time as you’re getting your paid parental leave payments, you do not use a secondary tax code.
Your employer will tax these payments as a lump sum (sometimes called an ‘extra pay’).
How to find your tax codes
You can use our tax code tool to find the tax codes that are right for you.
Or you can refer to the flowcharts in our Tax code declaration ─ IR330.
Complete my tax code declaration
Tailored tax codes
Sometimes the PAYE rules will not deduct the right amount of tax for your personal circumstances. If you want to reduce the chance of getting a tax bill at the end of the year, you can apply for a tailored tax code.
Need to change your tax code?
If your paid parental leave payments need a different tax code, let us know in myIR.
If your other payments need a different tax code, give your employer a completed Tax code declaration ─ IR330.
Mabel is a financial advisor with a major insurance company. Before going on parental leave, she uses a main M tax code for her salary because it is her main source of income.
For the time that she’s on parental leave, her employer chooses to pay her top-up payments to help out with expenses while she’s on a reduced income. She’s also expecting to receive a quarterly bonus.
She applies for paid parental leave, and we give her a notice of entitlement that tells her she’ll receive the maximum paid parental leave payments.
Mabel knows her top-up payments will be $400 a week, but she does not know how much her quarterly bonus will be.
As she’s going to be earning more than 1 regular source of income at the same time, Mabel needs to check her tax codes.
- She asks us to use the M tax code for her paid parental leave payments (as they will be her main source of income). If she selects the wrong code when first applying for paid parental leave, she can contact us in myIR to change this.
- At work, before she goes on leave, Mabel changes from the M tax code to a secondary tax code to apply to her top up payments. She does this by giving her employer a completed Tax code declaration ─ IR330.
This is the right decision. If she uses 2 M tax codes at the same time, this could lead to an end-of-year tax bill. She does not need to do anything in relation to her bonus ─ her employer will tax this as a lump sum.
Erica is a school principal in a small rural school. In August, she stops working to go on parental leave.
While on parental leave, Erica gets paid parental leave payments and no other income.
She asks us to put her on an M tax code.
After her paid parental leave payments finish, she works part time on a nearby orchard. The job is perfect for her because she can choose her hours to fit in with her baby.
The orchardist pays Erica schedular payments, deducting tax at the standard rate of 15%.
Erica knows her principal’s salary gives her a top tax rate of 30%, and the tax rate of 15% on her schedular payments might be too low for the total income she has earned that year. She worries she’ll get an end-of-year tax bill, so she asks us for a tailored tax code.
We send Erica a letter and certificate showing a tailored tax rate that’s right for her. She gives the certificate to the orchardist, and he starts deducting tax at the new rate.
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