Tax rate change for backdated lump sum payments

2 April 2024

2 minute read

Multi-year backdated lump sumpayments will now be taxed separately from other income received by a client in the same tax year. These lump sumpayments will be taxed at the client's average tax rate, calculated over the past four years before receipt of payment.

Prior to this change, backdated lump sum payments received by clients were taxed in the year of receipt at the client's marginal tax rate. This meant that the lump sum payment may have moved the client into a higher tax bracket.

The amendment for this alternate tax rate was passed in the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill.

Backdated lump sum payments that relate to more than one tax year for:

•weekly compensation (including accidental death)

•attendant care

•childcare

•home help

This does not relate to lump sum payments for permanent injury compensation.

We are required toapply thealternate tax rate to clients owed a backdated payment of weekly compensation that relates tooneor more tax years.

Clients can chooseto use the alternate tax rate for personal service rehabilitation lump sumpayments across multiple income years.

The alternate tax rate is calculated based on the average tax rate of the client's previousfour income tax years.

If a client has other obligations with IR such as Working for Families, child support, or a student loan,these may be affected. Clients should contact IR to discuss any implications.

This change takes effect forbackdated lump sum payments received after 1 April 2024.

More about multi-year backdated lump sum payments (Inland Revenue)