Average income earners could face losing up to a third of their redundancy payout in tax as the Government mulls whether to introduce tax relief.
People whose normal annual salary combined with a redundancy payout takes them over $70k a year must pay a flat 33 per cent tax rate on their payout.
On top of that, they may also have student loan repayments and KiwiSaver contributions taken out of their redundancy payout putting pressure on their immediate cashflow.
Robyn Walker, a tax partner at Deloitte, said that was tough for Kiwis looking for a new job in the current economic environment
"It is definitely difficult for people."
More than 15,000 workers have already lost their jobs since March and unemployment is expected to continue to rise.
Walker said during the global financial crisis, a special tax credit was introduced cutting the top tax rate on redundancy payouts from 39 per cent to 33 per cent.
"Back during the GFC, when the top tax rate was 39 per cent, there was a recognition that the treatment of redundancy payments was harsh and people were able to apply for a 6 per cent redundancy tax credit (which took the tax on the redundancy payment back down to 33 per cent)."
The 39 per cent tax rate was then permanently dropped to 33 per cent in October 2010 but Walker said tax relief should still be considered given the current tough economic climate.
"I think there is definitely merit in considering it."
Paying a high rate of tax on redundancy often means a person can be eligible to claim a refund at the end of the tax year after March 31, but that will be cold comfort to those who need the money now.
Walker said the current tax system worked on the assumption that a person was in employment and paying tax throughout the year.
But that may not be the case for many workers who lose their jobs now and may be unable to find work for some time.
That could leave them overpaying tax at a time when they really need the extra money.
Walker said those who got a payout over $30k could see themselves earning no other money until they get another job.
That's because those who get a payout over $30k before tax are not eligible for the Covid-19 income relief payment.
The benefit gives those who lost their job because of Covid-19 between March 1 and October 30 a weekly payment of $490 for those who normally worked more than 30 hours, and $250 per week for those who worked between 15 and 29 hours a week for up to 12 weeks.
The payment is not taxed.
A spokeswoman for Inland Revenue minister Stuart Nash said it was considering what to do about redundancy payouts.
"Government is considering a wide range of measures, including tax exemptions, but no decisions have been made."
An IRD spokeswoman said another redundancy tax credit would require new legislation.
"We wouldn't comment on it."
Walker said there were some ways to minimise tax sooner without having to wait until the end of the tax year and to maximise what you get in the hand from a redundancy payout.
KiwiSaver opt out
When you get a redundancy payout if you are contributing to KiwiSaver your contribution will also come out of the payout.
Walker said one way to reduce that was to take a savings suspension on KiwiSaver. This can be applied for through the IRD.
That will mean you get your contribution in the hand rather than it going into retirement savings.
But it will also mean you miss out on your employer KiwiSaver contribution.
"You win on one hand with cashflow." But miss out long term on having more money in your retirement savings.
Those with a student loan will also see that repayment come out any redundancy pay-out.
Walker said there was some talk about lifting the amount a person could earn before student loan repayments kicked in but this had been decided against.
Those who do get another job before March 31 could also apply for a tailored tax code from the IRD, Walker said.
The tax code allows people who may be facing a big tax bill or refund to even it out before the end of the tax year.
The code only lasts for one tax year but could mean if you have already paid too much tax that you pay either no tax or a reduced amount of tax on earnings from a new job.
Employers can also offer other benefits when a person is made redundant such as allowing a staff member to keep the laptop or phone they were using for work after the data has been wiped or selling them a company car at a reduced rate.
Fringe benefit tax will have to be paid on this but by the company not by the worker.
Contractors made redundant will have to sort out their own tax.
Walker said contractors should make sure they put money aside if they get a payout to pay their provisional tax.