Taxing Cashed-Up Annual Holidays

Employees can "cash in" up to one week of their annual holiday entitlement if the Employee and Employer agree. The cashing-in must be initiated by the employee as an employer cannot require an employee to take cash in lieu of holidays.

However the IRD advise the payment for this annual holiday should be treated as an extra pay or unexpected bonus and because it is taxable income, PAYE should be calculated using the rates for extra pays.

If the Employee usually has student loan or KiwiSaver deductions made from their pay, Employers should deduct these from the cashed-in annual holidays as well.

The Employees may need to check that the correct amount of PAYE has been withheld over the tax year. Also the Employee's child support liabilities and Working for Families Tax Credits entitlement may also need to be adjusted if their family income has changed.