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Change to Tax Calculations for Annual Leave

In the past when an employee was paid Annual Leave as a lump sum before they went on holiday, we were able calculate their tax based on the number of pay periods the payment covered. We were also able to tax final pays over a number of periods.

The IRD have changed their policy and now we must tax these payments as lump sums.

The affect is that your employees will pay more tax when they have their leave paid out before they go on holiday than if they were paid some leave each pay period on your normal pay cycle.

In most cases this change will mean that your employees will end up overpaying their tax for the year and so will be due a refund at the end of the tax year.

In our opinion this change penalises employees who want to get all their leave paid out before they travel. The IRD believe it reduces the likelihood of underpaying tax. You can find their statement here

Please let your staff know about this change as it may affect their holiday plans.

Topics: Operations

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