Q: We have a query and hope you can help us.
We often have someone terminating and we pay them In Lieu of Notice.
Is it correct that not an extra pay and we just tax it as normal?
Also, some of our waged employees applied for annual leave, says 4 weeks of annual leave and they want to be paid all together on their first week of annual leave. Is this called a lump sum payment? Does it attract extra pay tax? not 100% sure if that is the correct process?
A: If notice is paid in lieu, it is an extra pay (lump sum). It is not taxed as salary or wage.
If salary or wages are paid in advance, you actually have two options:
- Tax the entire amount as an extra pay https://www.ird.govt.nz/employing-staff/payday-filing/non-standard-filing-of-employment-information/holiday-pay-paid-in-advance
- Tax it normally over the period it represents https://www.ird.govt.nz/employing-staff/payday-filing/non-standard-filing-of-employment-information/holiday-pay-paid-in-advance/calculate-paye-on-holiday-pay-using-the-alternative-approach
I would tax it over the period it represents that would be fairer.