Key takeaways
- Resignation or normal retirement: unused annual leave is withheld at marginal rates. The ATO method spreads the payout across a year of pay periods so the withholding matches your usual bracket.
- Genuine redundancy, invalidity or early retirement scheme: the unused leave component is withheld at a flat 32%.
- Leave loading paid out with the leave follows the same treatment as the leave itself.
- Leave accrued before 18 August 1993 is withheld at 32% regardless of why you leave.
- In the worked example below, a $85,000 earner cashing out 4 weeks of leave ($6,538) loses about $2,092 of it to tax, roughly 32%.
- Withholding is not the final tax. The payout is assessed with the rest of your income at your return, and any over-withholding comes back as a refund.
The short answer
Your unused annual leave balance is a debt your employer owes you, and it gets paid out in your final pay. For tax, the reason the employment ended decides the withholding method. Leave the job voluntarily and the payout is treated like salary: marginal rates. Lose the job through genuine redundancy and the ATO applies a concessional flat rate of 32% to the leave component. Both paths come from Schedule 7, the ATO's tax table for unused leave payments on termination, which applies to payments made from 1 July 2026.
Resignation or retirement: marginal rates
When you resign, the employer cannot simply add the whole payout to one week's wages and withhold on that inflated figure, because that would push the single pay into the top brackets and grossly over-withhold. Schedule 7 fixes this with an averaging method: divide the leave payment by the number of normal pay periods in the year, add that slice to your normal gross earnings, work out the withholding on the combined amount from the regular tax table, and multiply the difference back out. The effect is that the payout is withheld at the marginal rate you actually sit in, as set by the 2026-27 tax brackets.
At assessment time the whole payout is simply assessable income in the year you receive it. If the payout lands late in June, it stacks on top of a full year of salary and can spill into a higher bracket; the same payout received in July starts a fresh income year. Timing a resignation around 30 June is one of the few legitimate levers here.
Genuine redundancy, invalidity and early retirement schemes: flat 32%
When the termination is a genuine redundancy, an invalidity, or an approved early retirement scheme, Schedule 7 replaces the marginal method with a flat 32% withholding on the unused annual leave and any leave loading. For most people made redundant this is close to their marginal rate plus Medicare, so the final assessment lands near the amount withheld.
Keep the components straight: the 32% applies to the leave part of a redundancy package. The genuine redundancy payment itself and any employment termination payment run under separate rules with their own tax-free and concessional treatment, which is exactly what the calculator for redundancy payouts splits apart for you.
Leave loading follows the leave
If your award or agreement pays annual leave loading (commonly 17.5%), the loading on the unused balance is paid out too, and Schedule 7 taxes it the same way as the leave it attaches to: marginal rates on resignation, 32% on genuine redundancy, and 32% for any component that accrued before 18 August 1993.
Long service leave: the date-based components
Unused long service leave in the same final pay follows Schedule 7 as well, split by when it accrued. For leave accrued before 16 August 1978, only 5% of the payment is taxed, at marginal rates. Leave accrued from 16 August 1978 to 17 August 1993 is withheld at 32%. Leave accrued after 17 August 1993 takes the same treatment as annual leave: marginal rates on a normal termination, 32% under genuine redundancy. Unless your service stretches back to the early 1990s, the post-1993 rules are the only ones that matter.
Worked example: 4 weeks of leave on a $85,000 salary
Say you resign from a $85,000 job with 4 weeks of untaken leave, worth $6,538. The marginal-rate treatment means the tax on the payout equals the extra tax created by adding it to your income for the year. Computing 2026-27 resident tax (with Medicare levy) both ways:
Tax on the leave payout, marginal-rate treatment
The share sits at 32.0% because this income lands in the 30% bracket and carries the 2% Medicare levy. This is an annualised approximation of the Schedule 7 method: payroll software runs the same logic per pay period and rounds to whole dollars, so the payslip figure can differ by a few dollars. The annual result reconciles at your tax return.
There is no special tax on leave payouts
The take-home on a final pay often looks light, and the usual conclusion is that leave payouts are taxed at some penalty rate. They are not. The withholding just runs at your top marginal slice rather than your average rate, the same thing that happens to overtime or a commission. A bonus paid in the same final pay is handled under a different schedule again, covered in the Schedule 5 tax table for back payments, commissions and bonuses. Whatever is over-withheld across these schedules comes back once the return is lodged.
Frequently asked questions
Is an annual leave payout taxed at a higher rate?
What rate applies to unused leave in a redundancy?
Is leave loading taxed on termination?
Can I take the leave instead of cashing it out?
Does the payout count towards HECS repayment income?
Will I get some of the withheld tax back?
Sources
- ATO: Schedule 7: Tax table for unused leave payments on termination of employment (NAT 3351, applies to payments from 1 July 2026)
Related resources
Redundancy Tax Calculator
The whole final payment: ETP, leave and the tax-free amount
Open →Schedule 5: Bonuses & Back Pay
How a bonus or commission in your final pay is withheld
Open →Tax Brackets 2026-27
The marginal rates the leave payout is taxed at
Open →
Narelle Hartigan is a CPA-qualified tax accountant with over a decade of experience in Australian personal taxation and payroll. She founded PAYG Calculator Australia to make tax withholding easy for every Australian worker to understand.