Inland Revenues Changes to Lump Sum Tax (Holiday Pay)
Q: What has changed?
A: When school employees receive their holiday pay in December (pay periods 18 or 19) they may notice a difference in their tax deductions.
Q: Why did the change occur?
A: Inland Revenue has changed its operational position on holiday pay to clarify the treatment of tax on holiday pay, annual leave on termination and accrued annual leave paid in advance. Since 1 April 2016, these types of payments have been taxed as "extra pay" and therefore at a lump sum rate.
Q: Who will it impact?
A: This change is not specific to the education sector - the changes will affect all New Zealanders receiving lump sum payments or extra pays throughout the year. If a school employee receives a leave in advance payment, termination or lump sum payment, the net payment is likely to change. This payment will be different for each individual. You are more likely to be affected if you are:
- a term time only non-teacher
- a fixed term teacher who has not worked for a full year
- an employee that is retiring or terminating your employment in a school.
Q: When will it occur?
A: It has been in place since April 1 2016 and occurs across the year. A number of sectors process a large number of these types of payments at particular times of the year. For the education sector this is the period leading up to Christmas (pay periods 18 and 19) pay days 12 and 19 December, 2016.
Q Will I be affected?
It will only apply to some school education employees not all. If you are affected the first time you will notice the change is when you see your pay slip and your holiday pay lump sum has a change in the net payment.
Q: Will my End of Year payment be taxed more or less?
A: You will find out when you receive your pay slip. It is potentially different for each employee dependant on other payments made through the year. Please see the note below on tax rates.
Q If I am affected how much will I be taxed?
PAYE applies to lump sum payments as follows:
- At a flat rate of 11.89 cents in the dollar - when the combined total of the lump sum payment and the grossed-up annual value of the employee's income for the previous four weeks is $14,000 or less
- At a flat rate of 18.89 cents in the dollar - when the combined total of the lump sum payment and the grossed-up annual value of the employee's income for the previous four weeks is from $14,001 to $48,000
- At a flat rate of 31.39 cents in the dollar -- when the combined total of the lump sum payment and the grossed-up annual value of the employee's income for the previous four weeks is from $48,001 to $70,000
- At a flat rate of 34.39 cents in the dollar -- when the combined total of the lump sum payment and the grossed-up annual value of the employee's income for the previous four weeks is greater than $70,000, but less than the ACC earners levy maximum threshold of $122,063 (for the 2017 tax year). Amounts above this level should have PAYE applied at 33%, or -- when the employee asks you to use this rate.
Q: Am I impacted if I am an annualised employee?
A: No. Because you will not be receiving any lump sums during the year.
Q: I think there is a problem with my pay? What do I need to do?
A: If you think there is a problem you need to check your details through the Inland Revenue's website myIR after March 31, the end of the tax year.
Q: How can I find out more?
A: Inland Revenue has a technical explanation for these changes on their website. You can check it out here