How do I cash out annual leave?

Under certain circumstances, employees may wish to “cash out” annual leave. In these scenarios, the law is very clear that employees are required to be paid the full amount that they would otherwise have been paid.  When “cashing out” your annual leave, you are required to pay super contributions as normal. It is really easy to cash out annual leave and make sure you are meeting your obligations. To cash out annual leave for an employee, follow these simple steps:

  1. You will need to create a Pay Category and call it "Leave Cash Out"  Set the "Units" field to Fixed.  This way when you include the pay category (Leave Cash Out), in the pay run, it will not adjust the normal hours that were worked by the employee who is "cashing out". (NB. if you pay leave loading you will also need to create a separate/new "Leave Cash Out Leave Loading" pay category because you will be manually paying the loading and you can't use the "system" leave loading pay category - set it up the same way as explained above for Leave Cash Out).  

    Also, "cashing out" generally does not accrue leave so by setting the "Units" to Fixed does not allow this pay category to accrue leave.  See image below;


  2. Once the pay category/categories are set up, go to the (regularly scheduled) pay run and find the employee that wants to cash out their leave - click on their name to expand the pay run record. 

  3. First apply the leave to the employee’s leave balance, (i.e. deduct the hours cashed out). To do this, click the “Actions –> Adjust Leave”.

  4. This will create a "Leave Adjustment" line.  You will then need to fill out the relevant fields, (see image below).  You will need to select "Annual Leave" as the leave category, and in the "Hours" field your will need to put in a minus figure to correspond to the amount of hours being "Cashed Out", (see in the image below we are cashing out 20 hours) and make sure you untick the Apply Earnings Rules box, where indicated. Then hit Save.

  5. Once the Leave Adjustment has been created we now need to insert an earnings line to pay the employee.  Using the "Actions" button again, select "Add Lump Sum", (see image below).

    NB. You will be using the lump sum payment method to pay this leave in order to aggregate the tax across multiple pay period but this feature does not work if there are not any other "ordinary" earnings in the pay run (see note at the bottom of this article for more detail on this).

  6. This will create an earnings line that you will need to fill in according to the amount of leave that is being "cashed out".  Firstly, you will see that an "Other Earnings" line has been created.  You will then need to select the "Leave Cash Out" pay category, the one we created in step 1.  

    Then, select Method A for the tax calculation and insert the number of pay periods you want this payment to be spread over (as leave accrues across the year you can spread the PAYG tax across the year - enter the number of pay periods that occur in one year for this employee).  This will adjust the PAYG accordingly.  


    Enter the the corresponding hours that you entered in as a minus in the "Leave Adjustment" row and enter the employee's normal hourly pay rate .  Then press Save.  

  7. If you are paying Leave Loading then follow steps 5. and 6. again but choose the Leave Cash Out -Leave Loading as the pay category and enter an hourly pay rate that is 17.5% of their normal hourly pay rate.

Once you've completed the above process your employee's pay run record should look something like this (numbers in the screenshot correspond with the steps above)...


If there are not any other ordinary earnings to be paid in the pay run you might as well use Take Leave and pay the leave out (in advance/cash out) as you would any other leave - then you will need to manually work out the amount of tax that should be paid and use the Adjust PAYG option from the Actions button to adjust the amount of PAYG to be deducted (enter a negative adjustment to reduce the automatically calculated amount).

More information on Cashing out Annual Leave can be found here

Explore related content

  • Entering Leave Taken Learn more about how you can add leave taken either during the pay run or via the Leave requests to your organisation's payroll platform.
  • Apply a Leave Request to a Pay Run Learn more about how to create a new pay run for your organisations and then add in‌ any required employee leave requests.

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