My employer has offered me the option to cash out some of my annual leave,(two weeks) but I’ve heard that it can be heavily taxed. I’m trying to understand how to reduce the tax — can anyone suggest ways to minimise it? like split payment or somethiing
How to Reduce Tax on Annual Leave Cash-out
georgev on 31/10/2025 - 10:37
Last edited 31/10/2025 - 10:43
Last edited 31/10/2025 - 10:43
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This is the way.
If OP can spare the funds, employer could pay it directly into super. Same outcome, less paperwork.
Is a good thing but as flagged later you lose leaving loading when you would have BEEN on that leave and you receive 0% super on the leave payout. Thats around about a 20% loss of whatever the wages are.
There's no reason not to have the best of both - i.e take leave, put full pre-tax proceeds from this into your super ensuring you do not go over your unused Concessional cap limit ($30k pa but you might have unused cap amounts to 'catch up' on) or use post-tax payment in as concessional payment and as you state lodge a Notice of Intent form with your super provider to claim back the tax paid above 15%.
https://www.ato.gov.au/forms-and-instructions/superannuation…The former route, as a straight salary sacrifice is less faffing & less can go wrong - same net outcome in tax paid at end of the year.
Losing super on leave is a moot point, unless you're planning retirement or a career break.
OP's choice is:
- 4 weeks of pay (work 2 weeks while paid out the 2 weeks annual leave) but receive only 2 weeks of super accrual; or
- 2 weeks of pay by taking the annual leave, still receive only 2 weeks of super accrual
The equation only changes if OP is planning to leave AND wants time off.
The choice is simply to have some time off or more money in the pocket. It's no more complex than that.
Curious as to why you are getting downvoted - perfectly reasonable comment for the time variable here. You can't just extend how long you are working somewhere to get super on both values in normal circumstances
@sakurashu: 🤷♂️
The 'you'll lose super by getting entitlements paid out' is one of those oft-repeated, objectively true statements that people mistakenly conflate as advice to not take the pay out.
The statement is true, but it doesn't equate to financially optimal strategy in many cases.
How many people still get leave loading?
Every year…
I do
@larndis: My OH and at least two of the kids. Never bothered to ask the others so maybe they do, maybe they don't?
And if it's more than $30k you can max out your concessional contributions for the last five years.
Gotta look into this- can we also do this on yearly bonus paid to super under concessional cap?
Yep; I used to earn a 5 figure bonus and it went straight into my super; just had to email payroll. Adjust the amount if you're at risk of exceeding the cap.
There's no way to minimise it beyond things like donations (where you "lose" more than what you'd lose from tax), buying computer/work-related equipment (same idea but at least you gain something), or reducing your income.
If you're worried about cashing it out all at once and having a big tax hit - the best way to manage that is to have the payment come as close as possible to end of FY (June 2026). That way you'd get the extra tax back pretty quickly.
But it really shouldn't be an issue generally - it's just "free" money in a sense.
There's no way to minimise it beyond things like donations (where you "lose"…
Superannuation
That works out the same if you happen to die before 60.
No it doesn't.
There will be more money in the super account…
@jv: You can’t take it out before 60 unless you’re terminally ill. Unfortunately, a terminal lack of comprehension doesn’t count - even if it’s clearly advanced and fatal to logic.
@jv: Don’t you get taxed at the same rate when you take it out as you would’ve when you put it in though?
Like I can get a $20,000 bonus from work and I can elect to put this into super or take it as normal pay.
If I nominate super and pay less tax, how can I get this out of super before 60 and pay less tax as I would now?
Don’t you get taxed at the same rate when you take it out as you would’ve when you put it in though?
No, it can be a lot less… No tax after 60 though…
https://www.ato.gov.au/individuals-and-families/super-for-in…
You can't take it with you when you're dead, just like property.
You can't take anything with you.
However most people don't want to be broke at retirement either - and the most tax efficient way to save for this is using superannuation.
Don't cash-out (period).
take the leave instead
THIS is the answer - as if the leave is cashed out, you can only do the basic things that one always does to reduce tax etc (as mentioned concessional super contributions etc).
But as one's financial benefit is the end goal….whats really lost is that when you are actually ON ANNUAL LEAVE you accrue more annual leave (and sick leave etc). By having it cashed out, you miss out on this benefit. Assuming you're getting the standard 4 weeks a year thats an ~7.6% payment of that period you're passing on vs if you took it. :-)
This is not correct. Purely financially speaking, working through the whole period and cashing out will always have you come ahead financially. I am not considering the mental health benefit here.
@CaptainCricket
Can you explain the rationale for your assertion please?
Working through the entire period….and cashing out means you are 1) not accrusing further leave whilst you are on leave 2) you are not paid 12% superannuation on the leave you are paid out on.
But you claim financially they are better off being paid out……so an explanation would be interesting?
@Daniel Plainview: OP will get their normal yearly salary plus 2 weeks pay so they will be ahead financially.
@gofree: @gofree
So the definition that you are using of 'ahead financially' is simply having more $$$ paid to you in the short term? As look if THAT is the definition used - I could concede that is true.However, it comes at a longer term cost - as mentioned you are passing over ATLEAST 20% of those funds paid - including whatever value you want to place on actually having that time off. All this would have paid in full in due course.
The OP did not indicate any need to enhance their cash flows, thus I would question this path of action - if chosen even more - but fair play I can see by that definition you have provided what might be meant and how it COULD be a prefered option given other variables - but too high a cost for me. :-)
@Daniel Plainview: Does it matter if you don't accrue on the cashed out leave? The time axis here is really important and in an isolated 1 year period you end up with more money and you accrue the same amount of leave etc. When you cash it out. If you extend this period to 2 years or 3 years the result is still the same unless you can compare with different time periods - i.e. having 2 weeks extra to play with to actually take the leave - so working somewhere for 1 year and 2 weeks vs working there for 1 year. If you extrapolate this for your working life you only come out ahead financially taking the leave if you hit a career break or larger block of time off to be able to extend the time axis of the taking leave option. There is a downvoted comment above that says this as well….
@sakurashu: With all due respect I am unclear of the point you are trying to convey.
My rebutal is far simpler than your 'example'. Take leave = You get leave loading on top of normal pay (i.e accrue more leave while on leave). Get paid out = you get the amount you would have been paid for working,but nothing more.
I will concede there are circumstances under which being paid out is preferential i.e time constraints. But based on the OP we did not know that, thus could only answer with what was given. Not say , "But if this then this would be better etc"
And if pure cash flow next payday is the preference - then a payout is better, if total returns over the time in the role is prefered taking the leave + loading is better. If paying less tax is better, then the OP likely needs to look at deductions like voluntary concessional contributions to their super etc.
PS. Not that you implied it but I don't downvote comments for just disagreeing, only if someone is obnoxious or unconstructive. Disagreeing is a good thing. :-)
@Daniel Plainview: Lets say OP has 2 weeks of leave available to take / cash out before Calendar Year end. Now if you work through 31 December, you get 2 months of pay + cash out leave. And super is still paid until 31 December.
Whereas, if you take 2 weeks of leave - you are behind 2 weeks.
@CaptainCricket: This is really semantics - as whats really the question is whether the OP wants 'cash flow' or 'total returns'. The not getting Super paid on paid out leave has been debunked, so that appears a moot point if the employer is handling properly.
But under any situation where their leave is paid out - they won't get the leave loading (more leave accrued whilst they are ON leave). Thats the main difference.
So sometimes the bird in the hand is worth two in the bush (more money up front) but as the OP rightly alludes, this may lead to more PAYG tax being taken out of their payroll, so can be not all it seems.
So whats 'right'? Nothing based on the OP - you'd need to know what the OPs preference is …other than paying less tax (which we can all empathise with). :-)
@Daniel Plainview: What I am trying to convey is the time axis
If you graph both options over any fixed time period you get the same amount of super and leave accrual in both.
1 year with 4 weeks of leave accrued either:
- take no leave and get 4 weeks paid out. You accrue leave equal to 1 year and super equal to 1 year (time worked)
- take 4 weeks of leave. You accrue leave equal to 1 year and super equal to 1 year (time worked plus during leave taken)
The leave accrual and super accrual is mostly irrelevant - the decision is merely leave or pay. If you do get paid super on paid out leave then that's just an additional element to the extra pay - the core of what you are missing out on is the leave itself, not financially
@sakurashu: Ok understood but the simple fact is the leave loading is worth ~7.5% of whatever their pay for that period is. Thats a significant factor IMHO and that of others…..passing on it, & not having the time off - which is surely worth a lot as well is the no brainer IMHO. Anyway I think we understand each other, OP can do what works best for them. :-)
@Daniel Plainview: Right - so it's probably fine to think of the paid out leave as being 7.5% less than your normal hourly rate (although super paid on it would be 12% in the other direction)
I'm actually purchasing additional leave so I can agree that the leave here is the important decision point and perhaps that's why I see these other pieces as less relevant in the decision making as well!
Cash out of annual leave in service is ordinary time earnings (OTE) meaning that it is subject to super accrual: https://www.ato.gov.au/businesses-and-organisations/super-fo…
I wouldn't trust the ATO community posts, they're wrong more often than not. In this case the ATO poster appears to be referring to unused leave paid out on termination (which isn't subject to super accrual).
@tiredaccountant: I tip my hat to you sir. It seems we have been incorrect in that regard - very happy to have been proven wrong - thank you for the excellent link and info. :-)
@tiredaccountant: My advice was based on the last few years when I wasn't paid super on my cashed out annual leave but I had it confirmed yesterday that it should have been paid. Just logged on now to reply to myself, thanks for the correction. Table 6 is what is relevant from the link above. My incorrect advice from yesterday has been unpublished.
If the employer wants to cash you out, you should not lose any entitlements. Work out the loss, ask to be paid the difference as a condition of being paid out.
Take it as part of a retrenchment and it will be taxed at 17% up to $245k rather than your marginal tax rate.
Annual leave isn't included as part of the ETP, it's taxed at the normal rate. It's also only 17% if you're over 60 (that's the rate for ETP over the tax free threshold, so that's the bit over $245k.
Leave it in there. It compounds each year tax free. What are you going to do with the money anyway?
Leave it in there.
Sometimes you don't have a choice…
You always have a choice
Cashing out leave is a crime against humanity in my book.
Username checks out. Nice.
Take the bloody leave - don't cash it out.
Next in the OP's Post.
"I haven't had leave in over a year, feeling burnt out, should i quit?"
Kinda what one of my last employers did… deny leave application, deny leave application, deny leave application, annual review "you have too much leave, you need to reduce it…" *sigh*
Take some leave!
My employer has offered me the option to cash out some of my annual leave
Of course they have.
It reduces the liability on the books, reduces its value based on any future pay increases you may get, doesn't acrue extra leave or super while being paid, and results in you still being at work during those weeks instead of the employer having to manage any workload during those times with other staff.If you want the $ instead, sure, but it comes with the fact you're taking it as additional earnings for the year and as such will pay tax on those earnings at whatever your marginal tax rate is (once you do your tax return at end of fy), no different than your salary/wage.
Correct. This will be about reducing the leave entitlements sitting on the balance sheet as a liability
Your employer may be able to force you to take the leave so if you feel cashing out is the better option then take it.
Regardless at what rate it is taxed at, at tax time it all squares up with your relevant tax bracket
Annual leave paid out as a wage / part of employemt is taxed normally
High tax applies when its a paid out entitlement at end of emplyment
Annual leave paid out as a wage / part of employemt is taxed normally
But you lose any super entitlements for that you 'would have' accrued over that time.
yeah i do believe that is correct
I just know i cashed out some leave once due to a need and it was taxed normally
I remember the cash office saying something about super but i was not listening ha ha habut i was not listening ha ha ha
your employer was also laughing ha ha ha
If your pay is $4000 /fn, before tax, you are in the 30% tax bracket. you receive $3070 after tax.
If you double that in one fortnight to $8000 by getting paid out 2 weeks annual leave, part of it is taxed at 37%, and part at 45%. You receive $5,540, so you pay about $600 too much tax in that fortnight.
When you do your tax return, you will get all of that $600 back, as $104,000 /year is in the same tax bracket as $108,000.
@ihbh
Get it paid in June so that the time between paying a higher rate and getting it corrected in your tax return is minimal.
offered me the option
An option is valuable, so leave it as is. Leaving it lets it grow at the rate of your salary. E.g. if in 40 years time, your pay goes from $40k p.a. to $120k p.a., then the weekly AL balance will also grow 3x.
Reduce tax - if you are made redundant, your AL balance is taxed at 32%. If you want to cash out, do it when your MTR is lowest. E.g. Next year you start working only 2 days a week or you take a long period of unpaid maternity/paternity leave, or jump into a massively negatively geared investment property. And you can contribute super up to your concessional cap ($30k from 1 Jul 2024) and get a deduction.
Or take annual leave - good for your mental health, etc. and you earn leave on leave, etc.
your AL balance is taxed at 32%
Does this 32% tax rate also apply to Long-Service Leave, as well?
do it when your MTR is lowest
What is MTR?
Yes, if made redundant.
Marginal tax rate.
Thank you, for clarifying :-)
Unless you need the money it’s better to keep the leave balance as it will benefit from any salary increases. If cashing out would pop you up a tax bracket or make you have to pay the Medicare Levy Surcharge or something then try and spread it over more than one financial year.
better to keep the leave balance as it will benefit from any salary increases.
This is a good advice, but some company policies view an employee with high leave balances, as a burden on the balance sheet, because Leave is a 'liability' for the company, ie. it owes that worker something.
Also, I have seen some internal company training material about Fraud where the policy describes or even classifies people who have high leave balances (read: reluctance to take Leave), as people who have a propensity to commit fraud.
Go figure.
They're making assumptions that a person with a high leave balance is still actually taking days off and just not reporting or recording it officially. There's no evidence that people with high leave balances have a greater than normal propensity to commit fraud.
I actually knew of someone that did not take their 4 weeks of Annual Leave for one year, accumulating that into the next year and had 8+ weeks of Leave at the end of the 2nd year too.
This person was not a good worker either, but soon after, he was made "redundant".
The thing is, some companies actually make it a serious KPI to maintain Leave balance under a certain amount of days, so it becomes counter-productive to hoard Leave.
The thing about Fraud training which I have seen before, is that one of the things to look out for, " is a person who does NOT take Leave " 🫣
They're making assumptions that a person with a high leave balance is still actually taking days off and just not reporting or recording it officially
That's not correct.
The connection between high leave balances and fraud is that the person committing fraud needs to maintain their artificial control over an aspect of the system (e.g. they are putting through a payrun to a fictional employee, and they need to intercept and delete the info from a pay report immediately after).
When they go on leave someone else has to run the system and suddenly emails start going around saying "what department does R. Ballboa work in, the system doesn't have an email for him?", and that's when they get caught.
Great chat @georgev. FFS
It will be taxed no greater than your marginal rate of tax.
Take the time off. Its good for you.
Likely to be pushed into next tax bracket for that pay period. Will balance out on completion of tax return.
As the OP hasn't said what their wage is you are only guessing.
What's the likelihood that the OP is earning exactly $18200, $45,000, $135,000 or $190,000 or within 2 weeks of their pay of those amounts?
I've had leave paid out a few times and at the end of the year the difference in tax is SFA.
Ask for it in cash in a big yellow envelope. Don't declare it.
how about something creative ozb like the claiming it as a deduction for concessional super contribution.
https://www.ato.gov.au/individuals-and-families/super-for-in…
It gets put into your super at a concessional rate and you get to fully deduct it from ITR.
If you can afford to not take leave, cash out is good too. Yes it gets taxes higher than normal, but at tax time you get it back, provided you still in the same income level.
Sacrificing to super is a better option if you can. Income is taxes at 15%.
Donation is another.
Heavily taxed?
I think you've been misinformed
What likely happens, is that it will be added to your current Pay period, the system assumes you earn that much every pay period, so will tax you at a high rate if its assumed you go up a tax bracket.
It doesnt matter much, because when you do your tax return, you will receive the over tax back.
At the end of the day its not much maybe a couple of 100 extra tax, that u will get back eventually
A couple things here.
I had a huge annual leave balance and my employer offered me the option of forced leave or take it as a lump sum payout. In this scenario you can’t just leave it and let it build up like everyone is suggesting.
Secondly maybe OP doesn’t want to take leave. My work is pretty cruisy and I enjoy my job so I don’t want to take 4 weeks of forced leave, so I took it as a lump sum payment.
Yes I was taxed at the max rate, but that’s life and I will get some back at tax time in 2026
How far into a marginal braket are you?
Spread it over multiple pay periods, or even across FY's.
Need more details.
Best to cash out close to EOFY for more clarity, and faster recoup of the extra taxation.
It was a fairly common thing back in the day when you were paid a bonus or received backpay that you'd pay "too much tax". What was actually happening was the payroll software would see you getting paid $10k this week and it would think "gee, I'd better tax this guy like he's going to make $520k this year" even though the $10k week was a one off.
It shouldn't happen anymore as modern payroll software should apply schedule 5 withholding to bonuses, commissions or certain other lump sum payments. The gist of schedule 5 withholding is that the software looks at your YTD earnings and PAYG withholding is calculated on averaged earnings for that period.
If you don't need the cash, just take annual leave.
While taking annual leave, you are still accumulating more annual leaves
Are you asking about how to reduce the amount withheld from your pay (I think split payments is the only answer, eg. get one week paid out per pay period instead of four weeks in one lump sum)? Noting if extra is withheld due to the extra pay pushing you into the next tax bracket, most/all of that will be refunded when you submit your tax return next year.
Or are you asking about the final tax owing for the financial year (after submitting your tax return), in which case super contributions etc. come into play?
The first one, allowed to take only two weeks cash out
I think getting one week paid at a time is your best bet, eg. one week of leave paid out next pay period and one week paid in the following pay (if your employer is willing to do that).
I don't think there is any other way to reduce the withholding - however I note other comments on here that payroll systems now are better at smoothing the withholding for one-off extra pay, so you might not need to do anything.
when milady wanted to retire, she had long service leave due, and wanted to cash out
I advised her to take the LSL at half-pay, which she did, and then accrued not only more leave loading, but also more super credits, which I forget but was probably worth at least an extra $1000 or so.
I'll guess the reason the boss is offering cash out is it would be cheaper for him, NOT better for you.
I'll guess the reason the boss is offering cash out is it would be cheaper for him, NOT better for you.
Yes, large leave balances are a liability for the employer, as if you were to resign, they would have a large cash payout that they would need to make.
One of the companies I previously worked at had a serious problem with large leave balances (there were people with 3+ months of accrued leave) that would need to be paid out if they were to leave.
The company had to end up incentivising people to take their leave by offering "5 for the price of 4", i.e. take a week off for only 4 days of leave, which helped significantly with reducing leave balances.
the marginal tax in most circumstances is the same on the leave payout as opposed to the regular pay. what you are asking is how to reduce tax withheld. a lot of people don't understand the difference between the two
Cash out after a pay rise. Wouldn't that be better
Cashing it out is heavily advantageous to your employer at your loss.
I’ve heard that it can be heavily taxed
It will not be more or less heavily taxed than your regular income - it will be taxed at your marginal rate, as if you were to just have received some additional income in the period it is to be paid.
Realistically, you have two options - you could simply take the leave, or you could choose to hold onto the accrued leave, and if you were to leave the company later on and have a period afterwards where you are not working, then you would pay less tax in that FY as your taxable income will be less (due to the period where you didn't work).
Ultimately, I would never suggest cashing out leave unless you have some incentive. Large leave balances are liabilities for employers, and if they want employees to cash out their leave, they should incentivise it (e.g. by offering them some additional financial benefit to cash out the leave).
Worth just pointing out that there are obviously strategies to reduce your tax, but that will not be specific to cashing out leave.
Ask for it to be paid in instalments. i.e one day annual leave pay out per pay cycle.
This would reduce the tax hit.
How so?
The only thing that matters is what FY it's paid out in. If it's all paid out in the same FY, it doesn't matter whether it's one payment or 26 payments.
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After you receive the cash, put a bunch of it in super up to your available concessional cap, claim the tax back at the EOFY.