How to Choose the Right Tax Codes on Paid Parental Leave

Making sure you use the right tax codes if you get other payments from your employer at the same time at Paid Parental Leave

Choosing the right tax code while on paid parental leave is essential in New Zealand — especially if you’re receiving other income during your leave. Paid parental leave payments are taxed just like regular income, so using the correct tax codes helps make sure you pay the right amount of tax throughout the year and avoid an unpleasant tax bill come 31 March.

Why Tax Codes Matter During Paid Parental Leave

Paid parental leave payments are considered taxable income in NZ. This means Inland Revenue deducts PAYE (Pay As You Earn) from each payment based on the tax code you select. Choosing the wrong code — especially when you have more than one income stream (such as employer top-ups or keeping-in-touch hours) — can result in underpaying or overpaying tax during the year.

What Paid Parental Leave Is (and How It’s Taxed)

Paid parental leave is a government payment for eligible parents while they’re off work caring for a new child. You may qualify as an employee or as a self-employed person, and Inland Revenue pays the amount directly. Because it’s treated like salary or wages, the payment is subject to PAYE tax.Paid parental leave payments are taxable just like a salary or wage. That means IR deduct tax (called PAYE) from each payment before it gets paid to you.

Main vs Secondary Tax Codes Explained

Every income source you receive needs the appropriate tax code so Inland Revenue can deduct the correct amount of tax.

When to Use a Main Tax Code

Use a main tax code (e.g., M, ME, M SL, ME SL) if it’s your primary source of income. This includes:

Your paid parental leave payment if it’s your main income for the year.

When to Use a Secondary Tax Code

If you also receive other income (like employer top-ups, holiday pay, or keeping-in-touch hours), you’ll need a secondary tax code (codes starting with S like SB, S, SH, ST). The secondary code:

Applies a flat tax rate on smaller income streams,
Helps ensure you don’t underpay tax during the year.

Example: If you’re on paid parental leave and also receiving top-ups from your employer, you might use a main tax code for your parental leave payments and a secondary tax code for the top-ups.

How to Update Your Tax Code

To update your tax code:

Employees submit a completed IR330 Tax Code Declaration to their employer.
For paid parental leave codes, you can update your details through myIR if necessary.

Avoiding an End-of-Year Tax Bill

Using the wrong tax code combination (like two main codes) may lead to under-deducted tax — meaning Inland Revenue could bill you at year-end. Choosing the correct secondary tax code helps spread appropriate tax deductions throughout the year.

Source: [IRD] Choosing the Right Tax Codes When on Paid Parental Leave (Employee)

Categories: : Parental Leave, Payroll, Tax