Tax on an annual leave payout.

When you leave a job, any annual leave you never took has to be paid out in cash. The part almost nobody explains properly is the annual leave payout tax: the rate your employer withholds does not depend on how much leave you have, or how long you worked there. It depends on why you left. Resign, retire or get moved on for poor performance and your unused annual leave is generally taxed at your normal marginal rates, exactly like a big final payslip. Leave because of a genuine redundancy, invalidity or an approved early retirement scheme and the same dollars are withheld at a flat 32%. This guide sets out the Australian Taxation Office (ATO) withholding table in full, explains what the flat rate really means at tax time, and works the same leave balance through both outcomes.

Why the reason you left changes the tax

Before your payroll team can work out a single dollar of withholding, the ATO requires them to answer one question first: is this payment being made as a result of a genuine redundancy, invalidity or an early retirement scheme? Everything else follows from that answer. The ATO calls the alternative a normal termination, and it defines that broadly enough to cover most exits: voluntary resignation, employment terminated due to inefficiency, and retirement.

The entitlement itself is not in dispute either way. Under the National Employment Standards your unused annual leave must be paid out when your employment ends, and the Fair Work Ombudsman is explicit that the payment must be the same amount you would have received had you taken the leave while still employed. That amount then lands in your final pay alongside your wages, any notice and any redundancy pay. Only the tax treatment forks. If you want the full picture of what should appear on that last payslip, our termination pay page walks through each component.

Two other things change the treatment: when the leave accrued, and whether you gave your employer a tax file number. Leave that accrued before 18 August 1993 is treated differently from leave accrued after it, which matters only to very long-serving employees. The TFN rules apply to everyone.

The ATO withholding table

The rates below come from ATO Schedule 7, the tax table for unused leave payments on termination of employment, which applies to payments made from 1 July 2026. It covers annual leave, leave loading, leave bonuses and long service leave. The right-hand column is where the amount shows up on your income statement or in Single Touch Payroll reporting.

Three rules sit around that table. First, if a post-17 August 1993 lump sum from a normal termination comes to less than $300, the employer withholds the lesser of the table amount or 32% of the payment. Second, if you have not given your employer a valid TFN before the payment is made, the rate is 47%, or 45% if you are a foreign resident. Third, withholding amounts are rounded to the nearest dollar, with 50 cents rounding up.

What "marginal rates" means on a final payslip

Marginal rates does not mean your employer looks up your tax bracket and multiplies. A lump sum of leave dropped into one pay period would push you into a bracket you do not really belong in, so the ATO publishes a seven-step method that spreads the payment across a full year before working out the tax. In plain English, your employer:

1. works out the normal tax on your usual gross pay for one pay period;
2. divides the leave payment by the number of pay periods in a year (52 weekly, 26 fortnightly, 12 monthly);
3. drops the cents from that result;
4. adds it to your normal gross pay for one period;
5. works out the tax on that combined, slightly larger figure;
6. subtracts step 1 from step 5, leaving the extra tax caused by one slice of leave; and
7. multiplies that extra tax back up by the number of pay periods in a year.

The result is the amount withheld from your whole leave payout. Your "normal gross earnings" for step 1 means everything except termination payments in your last full pay period worked, including taxable allowances, overtime and bonuses. Where your pay swings around a lot, the employer can use your average gross taxable earnings for the year to date instead. One quirk worth knowing: no amount is withheld for study and training support loans on an unused leave payment, so a HELP or HECS debt can still catch up with you when you lodge.

Genuine redundancy: the flat 32%

If your job is abolished, the whole picture changes. For a genuine redundancy, an invalidity retirement or an approved early retirement scheme, all of your unused annual leave is withheld at 32%, regardless of when it accrued. The ATO ties this treatment to three conditions: the termination happens before the time retirement or termination would ordinarily have occurred, it happens before you reach age pension age, and your employer has not agreed to re-employ you later.

The payment, including any leave loading attached to it, is reported at lump sum A rather than being buried in gross wages, and in your tax return it carries type code R. That code is what tells the ATO the concessional treatment applies. Everything else keeps the code T.

Here is the point that trips up almost everyone made redundant: your unused annual leave is not part of your genuine redundancy payment, and it does not use up any of the tax-free limit. The ATO expressly excludes lump sum payments of unused annual leave, leave loading and unused long service leave from a genuine redundancy payment. They are separate amounts, taxed under their own rules, sitting beside the redundancy figure rather than inside it. The tax-free limit and the employment termination payment (ETP) caps are covered separately in our redundancy tax guide, and the underlying entitlement in the severance pay guide and on the redundancy calculator.

The 32% is withholding, not your final tax

This is the single most misunderstood part of an annual leave payout. The 32% is a PAYG withholding rate. It is an estimate your employer sends to the ATO on your behalf. It is not a final, separate, sealed-off tax on the payment, and it is not a flat rate you have somehow locked in.

Under section 83-10 of the Income Tax Assessment Act 1997, an unused annual leave payment is included in your assessable income for the year you receive it. It goes into your tax return at question 3, employer lump sum payments, and it is added to your salary, your interest, and everything else you earned. Your final bill is then worked out on that total, and the amounts already withheld are credited against it. If too much was withheld you get a refund; if too little was withheld you get a bill.

What the 32% is doing is approximating a genuine concession. Section 83-15 of the same Act entitles you to a tax offset that ensures the rate of tax on an unused annual leave payment does not exceed 30%, to the extent the payment was made in connection with a genuine redundancy payment, an early retirement scheme payment or the invalidity segment of an ETP or super benefit, or was made in respect of employment before 18 August 1993. The Medicare levy of 2% of taxable income still applies on top, which is exactly where the 32% withholding figure comes from: 30% plus 2%.

Two practical consequences follow. If your marginal rate is above 30%, the offset caps the tax on this slice of income and you keep the benefit. If your marginal rate is below 30%, the offset does nothing for you, but the 32% withheld will be more than you actually owe on the payment, and the excess comes back as a refund when you lodge. Either way, you should never treat the flat 32% as the end of the story.

Leave loading is paid out, and follows the same rate

If you receive annual leave loading when you take leave, you receive it on the leave that is paid out too. The Fair Work Ombudsman is unusually blunt about this: annual leave loading is paid out on termination even when an award, enterprise agreement or employment contract says that it is not. The payout must match what you would have been paid had you taken the leave.

For tax, leave loading simply tracks the annual leave it attaches to. On a normal termination with post-17 August 1993 accrual, the loading is added to the leave amount and the combined figure goes through the marginal rate calculation. On a genuine redundancy, invalidity or early retirement scheme, the loading is withheld at the same flat 32% and reported at lump sum A with the leave. There is no separate loading rate to look up. Our leave loading page covers who gets the usual 17.5% and how it is calculated.

Is superannuation paid on an unused annual leave payout?

No. This is one of the most common questions about a final payslip, and the ATO answer is clear and does not depend on why you left. Unused leave on termination, including annual leave, annual leave loading and long service leave, is notordinary time earnings, and from 1 July 2026 it is not qualifying earnings either. Employment termination payments and unused leave payments do not form part of an employee's ordinary time earnings or qualifying earnings, so the employer does not calculate super guarantee on them. The ATO states this applies regardless of the reason for termination or the tax treatment of the payment. The basis for that calculation changed on 1 July 2026, when payday super has started replaced quarterly ordinary time earnings with qualifying earnings.

Two caveats are worth checking. Super is still owed on the ordinary wages you earned up to your last day, so make sure your final contribution is right. And an award or enterprise agreement can impose extra super obligations on amounts that are not ordinary time earnings, so it is worth reading your instrument on the awards page before assuming nothing is owed.

Long service leave works differently

If you are also being paid out unused long service leave, do not assume it follows the annual leave answer. Long service leave has three accrual bands rather than two, and the oldest band gets the most generous treatment of any leave payout in the system:

• Pre-16 August 1978. Only 5% of the total is subject to withholding at marginal rates, whatever the reason for leaving. It is reported at lump sum B.
• 16 August 1978 to 17 August 1993. Withheld at 32%, whatever the reason for leaving, and reported at lump sum A.
• Post-17 August 1993. Marginal rates on a normal termination, 32% on a genuine redundancy, invalidity or early retirement scheme.

In practice, only employees with decades of unbroken service still have pre-1993 components. Everyone else is dealing with the post-17 August 1993 band alone, where long service leave and annual leave behave identically. How much long service leave you are actually owed is a state and territory question, covered on our long service leave page.

Two worked examples on the same leave balance

The examples below use identical facts apart from the reason for leaving. Both employees have $6,000 of unused annual leave, all accrued well after 17 August 1993, both have quoted a TFN, and both are Australian residents for tax purposes. Assume for both that their other income for the year puts this payment in a 37 cents in the dollar bracket. Check the bracket that applies to your income year on the ATO resident tax rates page.

Change one assumption and the picture shifts again. If Priya's income for the year were low enough that her marginal rate sat below 30%, the 32% withheld would exceed what she actually owes on the payment, and the difference would come back to her as a refund. That is the whole point of separating withholding from final tax liability.

Frequently asked questions

Is annual leave taxed at 32% when you resign?

Generally no. On a voluntary resignation, unused annual leave accrued after 17 August 1993 is withheld at marginal rates and included in your salary and wages. The flat 32% applies to a resignation only for the rare slice of leave that accrued before 18 August 1993, or where the post-1993 payment is under $300 and 32% happens to be the lesser amount.

Why is my redundancy leave payout taxed at 32% when my marginal rate is lower?

Because 32% is a withholding estimate, not your final tax. The payment goes into your assessable income and your real liability is worked out across your whole year. If 32% was more than you owed on it, the excess comes back as a refund when you lodge your return.

Does unused annual leave count toward the genuine redundancy tax-free limit?

No. The ATO expressly excludes lump sum payments of unused annual leave, leave loading and unused long service leave from a genuine redundancy payment. They are taxed under their own rules and use up none of the tax-free limit. See our redundancy tax guide for how that limit is calculated.

Do I get super on my annual leave payout?

No. Unused leave paid on termination, including annual leave, leave loading and long service leave, is not ordinary time earnings or qualifying earnings, so no super guarantee is payable on it regardless of why you left. Super is still owed on the ordinary wages you earned up to your final day.

Is annual leave loading paid out when I leave?

Yes, if you would have received loading had you taken the leave. The Fair Work Ombudsman confirms leave loading is paid out on termination even where an award, agreement or contract says otherwise. For tax, it follows the same rate as the annual leave it attaches to.

What happens if I have not given my employer a tax file number?

Your employer must withhold 47% from the unused leave payment, or 45% if you are a foreign resident. You can still recover any over-withholding through your tax return, but quoting a valid TFN before the final payment is made is far simpler.

Is sick leave or personal leave paid out too?

No. Unused personal or carer's leave is not paid out when employment ends under the National Employment Standards. Only annual leave and, where you qualify, long service leave are cashed out on termination. Some employers pay unused sick leave voluntarily, in which case it is treated as part of an ETP rather than as an unused leave payment.

Can I avoid the tax by taking the leave instead of being paid out?

Taking leave before you finish means it is taxed as ordinary wages in the pay periods you take it, which may or may not work out better. Cashing out leave while still employed is a separate arrangement with its own strict conditions, set out in our cashing out annual leave guide, and if you have built up a very large balance the rules in the excessive annual leave guide may apply. This page is general information, not tax advice, so check your own position with a registered tax agent.

Author & reviewer

Sarah Reid, CAHRI

Certified Australian HR Practitioner · Cert IV Payroll · 12 years Fair Work compliance

Sarah has spent over a decade advising Australian SMBs on Fair Work, NES compliance, and payroll. Based in Sydney, she has worked across hospitality, retail and professional services.

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