Understanding tax deductions can be confusing! This article answers the most common questions we receive about tax calculations in PaySauce.
For a more detailed guide to the difference between PAYE tax and lump sum tax, check out our Tax 101 guide:
Why does the tax seem too high?
There are several reasons why the tax on a pay might appear higher than expected:
1. Termination (final) pays
When an employee leaves and receives their final pay, any lump sum payments such as unused annual leave are taxed using the lump sum payment method rather than regular PAYE rates. This often results in a higher tax rate than a usual pay, because the whole amount is taxed at one flat rate selected based on rules that IRD provides.
2. Annual leave cash-ups
When employees cash up their annual leave (rather than taking it as time off), it's taxed as a lump sum payment. This means the flat rate of tax is applied to the whole payment, same as a final pay.
3. Normal pay with higher earnings
Sometimes the tax isn't actually "too high" - it's simply correct for the amount earned in that pay run.
PAYE tax in New Zealand is progressive, which means:
The more you earn in a pay period, the higher percentage of tax you pay
If your employee has higher earnings in one pay period, all of the earnings in that period are used to calculate the PAYE amount - it isn't 'smoothed' or recognised that the pay is higher than ordinary
The tax tables and calculations in PaySauce follow IRD's specifications, which determines exactly how much tax should be withheld based on earnings and tax codes
Why does the tax seem so low?
We often receive this question with lump sum payments when previous earnings from the prior pay periods were low.
The lump sum tax calculation looks at the previous 4 weeks of earnings to estimate annual income (or two prior paid periods if the payment relates to end of employment). If an employee had lower than usual earnings in those weeks (for example, they just started, were on unpaid leave, or worked reduced hours), this results in a lower annual income estimate. This results in a lower tax rate being applied to the lump sum payment. This is still following IRD's specifications exactly. Employees can voluntarily choose a higher tax rate if they wish.
What are lump sum payments?
Lump sum payments (also called "extra pays") include:
Termination payments including unused annual leave at the end of employment
Annual leave paid in advance or cashed up
Bonuses paid as one-off payments
Redundancy payments
These payments are taxed differently from regular wages to ensure the correct amount of annual tax is collected.
Read more in our Tax 101 article:
How can I check if the tax is correct?
Check the payment type: Confirm whether it's a regular pay (using PAYE rules) or includes lump sum components (termination pay, leave cash-up, bonuses).
Review the tax code: Ensure your employee is using the correct tax code. Different tax codes have different calculations.
Use IRD's PAYE calculator: Employees can verify their tax using the official PAYE calculator on the IRD website. Just note that this won't give the right results for lump sum payments.
Reference the IRD tax tables: IRD publishes weekly, fortnightly, and monthly PAYE deduction tables that show exactly how much tax should be withheld for different income levels and tax codes.
Where can I learn more?
For detailed information about payroll tax calculations, refer to:
IRD's Payroll Calculations and Business Rules Specification (updated annually)
IRD's Employer's Guide (IR335)
IRD's PAYE deduction tables
You can access these documents on the IRD website at www.ird.govt.nz
Can I override the tax calculations in PaySauce?
No, PaySauce does not permit you to override the tax calculations performed. All tax calculations are carried out strictly following the specifications provided by IRD.
In the case of a lump sum payment, you can choose a higher tax rate than the one PaySauce has automatically selected, but you cannot choose a lower one.
We do not allow any other direct adjustments to either PAYE or lump sum tax calculations.
How do I get a tax free threshold for a child?
We have a whole article on this, here:
Why does my contractor rate not come out the same as the contractor invoice?
Usually because contractors calculate the withholding tax on their invoice as a percentage of the whole amount, dollars and cents. IRD specifications say to calculate it on the whole dollar amount only, which is what PaySauce does.
Still have questions?
If you're unsure about a specific pay:
Contact the PaySauce support team - we're here to help explain what's happened
Your employee can contact IRD directly to discuss their personal tax situation
Consider consulting with an accountant or tax advisor for complex situations
Remember: PaySauce calculates tax according to IRD's official rules and specifications. We cannot change how tax is calculated, but we can help you understand why the calculation resulted in a particular amount.
This document is for general guidance only and reflects tax rules current as of November 2025. Tax rules may change. For personalised tax advice, please consult with IRD or a qualified tax professional.