Tax on Bonuses and Redundancy Pay
A bonus, redundancy payment or back pay is taxed as extra pay. Payroll annualises your recent regular earnings, adds the payment, and charges the income tax rate that the combined figure falls into on the whole payment. Redundancy and retirement payments carry no ACC earners' levy. Bonuses and back pay do.
Tax on your extra pay
- Your pay, annualised
- $78,000.00
- Plus the extra pay
- $10,000.00
- Grossed-up figure
- $88,000.00
- Rate that applies
- 33%
- Income tax on the extra pay
- − $3,300.00
- ACC earners' levy
- − $175.00
- What lands in your account
- $6,525.00
You keep 65.3% of the payment. The 33% rate comes from the grossed-up figure of $88,000.00, not from the payment on its own, which is why a larger extra pay can push itself into a higher rate.
The extra pay rule, in three steps
Extra pay is never taxed on its own. The rate is decided by what your income would look like if your recent pay continued for a full year, with the extra payment added on top.
- Annualise your recent regular pay. For a bonus or back pay, payroll takes the four weeks ending with your last pay period and multiplies by 13. On monthly pay it takes the last month and multiplies by 12.
- Add the extra pay to that figure. The result is the grossed-up amount, and it is truncated to whole dollars before anything else happens.
- Charge the rate for that band on the whole extra pay. Not on the part that crosses the threshold. On all of it. Then add the 1.75% ACC earners' levy, unless the payment is exempt.
Step one is why two people on the same salary can pay different rates on an identical bonus. Someone who took four weeks of unpaid leave immediately before the bonus annualises to a much lower figure, and a lower rate applies to their whole payment.
Termination lump sums annualise differently
From 1 April 2025 a lump sum paid when employment ends uses a shorter look-back than a bonus does. It annualises the last two pay periods rather than the last four weeks.
| Payment | What gets annualised | Multiplier |
|---|---|---|
| Bonus, back pay, gratuity | The four weeks ending with your last pay period | × 13, or × 12 on monthly pay |
| Redundancy, retiring allowance, other termination lump sums | Your last two pay periods | × 26 weekly, × 13 fortnightly, × 6 monthly |
On steady pay the two rules land on the same annual figure. Two weekly pays multiplied by 26 and four weekly pays multiplied by 13 both come to 52 weeks of the same number. They diverge only when your last few pay periods were unusual, which at the end of a job they very often are: a short final week, a period of notice worked at reduced hours, or a month with no pay at all.
Example 1. A $10,000 bonus on a $80,000 salary
- 1.Regular pay, annualised$80,000.00
- 2.Plus the bonus$10,000.00
- 3.Grossed-up figureTruncated to whole dollars before the rate is chosen.$90,000
- 4.Income tax on the bonus33% on the whole $10,000, not just the part above a threshold.− $3,300.00
- 5.ACC earners' levy at 1.75%− $175.00
- Bonus paid to you$6,525.00
Example 2. A $30,000 redundancy payment on a $80,000 salary
- 1.Regular pay, annualised$80,000.00
- 2.Plus the redundancy payment$30,000.00
- 3.Grossed-up figure$110,000
- 4.Income tax on the payment33% on the whole payment.− $9,900.00
- 5.ACC earners' levyRedundancy and retirement payments are exempt from the levy.$0.00
- Redundancy paid to you$20,100.00
Which payments escape the ACC levy
The 1.75% earners' levy applies to most extra pay, but three categories are exempt. The difference is worth $525.00 on a $30,000 payment.
| Payment | ACC earners' levy |
|---|---|
| Redundancy payment | Not charged |
| Retiring allowance | Not charged |
| Employee share scheme benefit | Not charged |
| Bonus or incentive payment | Charged |
| Back pay and pay settlements | Charged |
| Annual leave paid out when you leave | Charged |
A final pay usually contains both kinds at once. The redundancy component is exempt, the leave payout beside it is not, and they sit on the same payslip taxed at the same income tax rate with different levy treatment. That is not a payroll error.
There is no tax-free redundancy payment in NZ
New Zealand has no tax-free threshold for redundancy and no discounted rate for it. Every dollar is taxed at the rate the grossed-up figure falls into, starting at 10.5% and reaching 39%. A redundancy tax credit existed briefly and was repealed. Any page still describing one is describing a rule that no longer operates.
Why it looks over-taxed, and when you get it back
Extra pay withholding is a snapshot. It assumes your recent pay rate continues for the whole year, and it assumes the extra payment sits on top of that. When either assumption is wrong, the withholding is wrong with it.
- A redundancy payment usually over-withholds. The calculation annualises the salary you were on, then you stop earning it. Your actual income for the year finishes lower than the grossed-up figure assumed, so the rate charged was too high and the difference comes back at the New Zealand tax refund.
- A bonus in a year you also changed jobs can go either way. Inland Revenue adds up everything after 31 March and settles the difference. Nothing about the extra pay calculation is final.
- The pay date decides which tax year it belongs to. A bonus paid on 31 March falls in the year that is ending. Paid on 1 April it falls in the next one, against a different set of annualised earnings. Tax year dates.
Common questions
How is a bonus taxed in New Zealand?
A bonus is an extra pay. Payroll annualises your recent regular earnings, adds the bonus, and applies the rate the combined figure falls into to the whole bonus, plus the 1.75% ACC earners' levy. On $80,000 a $10,000 bonus is taxed at 33%, leaving $6,525.00 before student loan.
Is redundancy pay taxed in New Zealand?
Yes, in full. There is no tax-free redundancy amount in New Zealand and no concessional rate. It is taxed as an extra pay at the rate your annualised earnings plus the payment fall into. The one difference from a bonus is that redundancy and retirement payments carry noACC earners' levy.
How much tax will I pay on a redundancy payment?
The rate comes from your annualised pay plus the payment. On $80,000 a $30,000 redundancy payment grosses up to $110,000, which sits in the 33% band. $9,900.00 of tax comes out, $20,100.00 is paid to you, and no ACC levy is deducted.
Why was my bonus taxed at 39%?
Because the rate is set by your annualised earnings plus the bonus, not by the bonus on its own. A large payment can push the combined figure into a higher band even when your salary alone sits well below it, and the rate then applies to the whole payment.
Does a student loan repayment come out of a bonus?
Yes, if your tax code carries the SL suffix. Extra pay is salary or wages, so 12% comes out of it. No pay-period threshold is allowed against it, because the threshold has already been used against your regular pay for that period.
Is back pay taxed differently from a bonus?
No. Back pay, bonuses, redundancy, retiring allowances and gratuities are all extra payunder one rule, and all use the same annualise-then-add calculation. The only differences are whether the ACC earners' levy applies and which pay periods get annualised.
Where these figures come from
- IRD. Tax rates for individuals
- IRD. ACC earners' levy rates
- IRD. Payroll calculations and business rules specification
2026–27 tax year (1 April 2026 – 31 March 2027). Last verified 30 July 2026.
Related
- New Zealand PAYE tax ratesThe rates the grossed-up figure lands in
- ACC earners' levyThe deduction redundancy payments are exempt from
- holiday pay calculatorThe other lump sum in a final pay
- New Zealand tax refundWhat happens if the extra pay over-taxed you
- the New Zealand tax yearWhy the pay date of a bonus matters
- take-home pay calculatorYour regular pay, on the same engine