Do you pay tax on an annual leave payout?
Yes — unused leave paid out when you leave a job is taxable. How it's taxed, and why the withholding can look high.
Last updated 3 November 2026
Short answer: yes, an annual leave payout is taxable. When you leave a job, any unused annual leave is paid out as a lump sum — and it counts as income. What trips people up is how much tax comes out, which often looks far too high. Here’s why, and what you actually keep.
How a leave payout is taxed
For a normal departure — resignation or retirement — your unused annual leave is taxed at your marginal tax rate, exactly like ordinary salary. It’s added to your income for the year and taxed accordingly. Any leave loading (often 17.5%) that applies is usually paid out with it and taxed the same way.
If you’re leaving because of a genuine redundancy, invalidity, or an early retirement scheme, the rules are kinder: the unused annual leave is taxed at a concessional maximum rate of 30% plus the 2% Medicare levy. For higher earners that’s less than their normal marginal rate.
Why the withholding looks so high
This is the part that surprises people. Your employer withholds PAYG tax from the lump sum using a method that assumes the payment sits on top of your income — so it’s withheld at a higher flat rate than your regular pay. On your payslip it can look like 30–47% disappeared.
That withholding is not necessarily your final tax. When you lodge your tax return, the payout is taxed at your real marginal rate for the whole year. If too much was withheld — common if you stopped working partway through the year and your total income is lower — you get the difference back as a refund.
Worked example
Say you resign with three weeks of accrued annual leave and your gross pay is about $1,500 a week. The payout is roughly $4,500 gross (plus any leave loading). Your employer withholds tax at the lump-sum rate, so you might receive around $2,900–$3,200 in hand. At tax time the $4,500 is taxed at your marginal rate for the year, and any over-withholding comes back.
The bottom line
- The payout is taxable — there’s no tax-free leave payout for a normal resignation.
- High withholding ≠ high final tax. Your return sorts out the real figure.
- Genuine redundancy gets a concessional 30% + Medicare rate on the leave.
Estimate your accrued leave and the gross payout with our annual leave payout calculator, then check how the lump sum affects your yearly tax with the salary calculator.
This is general information, not tax advice — for genuine redundancy and large payouts, confirm your situation with the ATO or a registered tax agent.
Work out your own numbers
Frequently asked questions
Do you pay tax on unused annual leave when you resign?
Yes. A payout of unused annual leave is taxable income. If you resign or retire normally, it's taxed at your marginal tax rate, the same as ordinary pay. Your employer withholds PAYG tax from it, and it's reconciled when you lodge your tax return.
Why was so much tax taken out of my leave payout?
Lump-sum payments are withheld at a higher flat rate than your normal pay, because the ATO's withholding method assumes the lump sum sits on top of your income. It often looks like too much. If your actual marginal rate for the year is lower, you get the difference back as a refund at tax time (or owe less).
Is annual leave taxed less if I'm made redundant?
Yes. If the payout is because of a genuine redundancy, invalidity or an early retirement scheme, the unused annual leave is taxed at a concessional maximum rate of 30% plus the 2% Medicare levy, rather than your full marginal rate. This is more favourable for higher earners.
Does leave loading get paid and taxed too?
If your award or agreement provides annual leave loading (commonly 17.5%), it's generally included in the payout of unused leave and taxed the same way as the leave itself.