The Holidays Act allows employers and employees to mutually agree to be paid out some of their annual leave. This is known as cashing in annual leave.
There are a number of rules that apply to this scheme, so we recommend you check these rules on the Department of Labour website. A summary of the changes appears below:
- Employees need to request in writing that leave is to paid out
- Employers can decline any request
- Employers cannot require employees to have leave paid out
- Typically a maximum of one week can be paid out during an employees entitlement year (that is, the period between holiday anniversary dates)
- Regardless of whether it is taken or paid out, leave must be paid at the greater of the employee's ordinary weekly pay as at the beginning of the holiday, or the employee's average weekly earnings for the 12 months before the holiday.
- Leave which is paid out is not included in gross earnings for the purpose of calculating leave rates and balances.
- Cashed in annual leave is considered a lump sum payment so KiwiSaver deductions will apply to the payment.
Annual leave can be cashed in as a one-off payment (a lump sum) or processed as part of a normal pay. The IRD rules for taxing lump sum payments (also known as Extra Pays) also apply to lump sums of annual leave paid out.
Paying out annual leave
There are two pay codes related to paying annual leave: ANHL - Annual Leave and ANHLCASH - Annual Leave Paid Out. You need to use the ANHLCASH - Annual Leave Paid Out pay code to ensure that leave balances are automatically adjusted and that leave is correctly calculated.
Do not use the ANHL-Annual Leave or HP-Holiday Pay pay codes for cashing in annual leave. Using these codes will inflate the employee's gross earnings and lead to incorrect leave calculations.
Before you can pay out annual leave, you need to add the ANHLCASH pay code to the employee's defaults.
- Go to Maintain Employees and select the relevant employee.
- On the Pay Defaults/Totals tab select New and select the ANHLCASH pay code, then click Ok.
Do not set a default quantity.
- Go to the Prepare Pays command centre and click Enter Pays.
Double-click the relevant employee. The Enter Pays Details window appears.
Enter the number of hours that you have agreed to pay out in the Quantity column of the ANHLCASH pay code line.
The ANHLCASH pay code uses the same rate as the ANHL-Annual Leave pay code. This rate can be modified in the Leave Details window (click the Leave button).
You cannot pay out more than one week of annual leave in an employee's entitlement year. The week is defined by the normal hours per week value entered in the Leave Details window (click the Leave button). The entitlement year is defined by the Next Holiday Anniversary Date in the Leave Details window (click the Leave button).
If the quantity entered (plus any leave already paid out), is greater than the normal hours per week, a message appears advising you how much leave can be paid out and how much has already been paid.
- Click the PAYE amount in the Rate column.
- Click Tax Override. The Pay Frequency/Tax Override window appears.
- In the Extra Pay Amount field, enter the total value of annual leave being paid out.
Select the appropriate tax code based on the employee s annual earnings. Refer to the table below as a guide:
Income Tax Code to Use $0 - $14,000 SB $14,001 - $48,000 S $48,001 - $70,000 SH $70,001 and above ST
- Click Ok.
All holiday and leave reports have been updated to include annual leave paid out amounts.
The Employee Holiday report will display Annual Leave Paid Out on a separate line.