The Redundancy Tax Credit
What is the redundancy tax credit?
Income earners can be overtaxed when their redundancy payments push them into a higher tax bracket.
The government has passed legislation making taxing redundancy payments fairer to people who are pushed into a higher tax bracket when they receive the lump sum payment.
A simple tax rebate (the redundancy tax credit) has been introduced that will apply to redundancy payments paid on or after 1 December 2006.
So, who can apply?
The redundancy tax credit is generally allowed on a redundancy payment that is:
- paid to an employee whose employment is terminated because the position is surplus to the requirements of the person's employer, and
- compensation for the person's loss of employment.
Who cannot apply?
Some payments do not qualify for the redundancy tax credit.
The redundancy tax credit is not allowed for a payment for:
- retirement from employment
- loss of seasonal employment arising from a normal seasonal work cycle
- a contract of employment for a fixed term, or for the duration of a project
- employment for a period following notice of termination of employment
- a redundancy payment paid, directly or indirectly, by an employer who is "associated" (see below) or related to the employee.
Associated rules apply
The tax credit is not allowed for a redundancy payment paid, directly or indirectly, by a person who is "associated" or related to you.
Payments that may not qualify for the tax credit include redundancy payments paid directly or indirectly by:
- a company to its director, or to a shareholder-employee
- an employer who is a close relative of the employee, or spouse, or civil union or de facto partner
- a partnership to any of its partners
- a trustee to an employee who is also a beneficiary or a settlor of the trust.
How to claim
To claim the redundancy tax credit, you will need:
- a Redundancy tax credit (IR524) claim form. To download go to "Forms and guides" on the IRD website below.
- supporting documentation from your employer that clearly shows the amount of the redundancy payment received - this could be any of the following:
- a signed letter from your employer, including the amount and date of the redundancy payment
- a calculation sheet showing a breakdown of how the redundancy amount was calculated
- payslip/s that clearly show the amount of the redundancy payment.
If you are unable to get any documentation from your employer to support your claim, please phone the IRD on 0800 020 012.
