Getting a lump sum payment can feel like a windfall — a bonus, back pay from a wage underpayment, or a redundancy payout landing in your bank account all at once. But lump sums are taxed in Australia under rules that are very different from ordinary salary, and misunderstanding them can cost you thousands. A lump sum can push you into a higher tax bracket, trigger a Medicare levy surcharge you wouldn’t normally pay, or — if it’s reported the right way — attract a tax offset that saves you money.
This guide explains how lump sums are taxed in Australia for the 2025–26 income year: how bonuses are taxed, how back pay qualifies for the lump sum in arrears tax offset, and how redundancy and employment termination payments are taxed under the ATO’s concessional ETP rates.
What counts as a lump sum payment?
For tax purposes, a lump sum is a one-off payment that covers a period of time rather than your regular pay cycle. The most common lump sums Australian workers receive are:
- Bonuses and commissions — performance bonuses, sign-on bonuses, annual incentive payments.
- Back pay — underpaid wages paid late, usually after a Fair Work claim, payroll audit or enterprise agreement backdating.
- Redundancy and termination payments — severance, golden handshakes, payments in lieu of notice, unused sick leave.
- Unused leave paid out on termination — accrued annual leave and long service leave cashed out when you leave a job.
- Workers compensation lump sums — in some cases taxable as ordinary income.
The key point: the general rule is that employment income is assessable in the year you receive it, regardless of which period it relates to. The tax system then applies different concessions depending on the type of lump sum.
How bonuses are taxed in Australia
Bonuses are taxed as ordinary employment income at your marginal tax rate — exactly the same rate as your salary. A $10,000 bonus for someone earning $90,000 a year sits in the 30% bracket, so it attracts roughly $3,000 in income tax plus the 2% Medicare levy, around $3,200 all up.
What trips people up is the PAYG withholding. Employers don’t withhold tax on bonuses at your normal salary rate — they use the ATO’s separate tax table for back payments, commissions, bonuses and similar payments (Schedule 5). Because your employer can’t know your full year’s income position, the withholding on a bonus is an estimate, and it often differs from your final liability:
| Scenario | What happens |
|---|---|
| Employer withholds more than your marginal rate | You get the excess back as a tax refund when you lodge your return. |
| Employer withholds less than your marginal rate | You owe the ATO the shortfall at tax time. |
| Bonus pushes you into a higher bracket | Only the slice of income in the higher bracket is taxed at the higher rate — not the whole payment. |
| Bonus pushes you over an MLS threshold | You may owe the Medicare levy surcharge (1–1.5%) on top if you don’t hold hospital cover. |
If you receive a bonus, you can estimate the tax on it with a bonus tax calculator and compare that with what your employer withheld from your payslip. A mismatch of a few hundred dollars either way is completely normal.
Back pay and the lump sum in arrears tax offset
Back pay is the lump sum most likely to be overtaxed. Suppose you were underpaid $5,000 a year for three years, and your employer now pays you $15,000 in one hit. If that $15,000 is simply added to this year’s income, it could be taxed at 30% or 37% — even though in each earlier year it would only have been taxed at 16% or 30%.
To fix this, the ATO offers the lump sum payment in arrears (LSPIA) tax offset. If your back pay qualifies, the ATO calculates the tax as though you’d received the money in the years you actually earned it, and gives you an offset for the difference.
How the LSPIA offset works
- Your employer reports the back pay as “Lump Sum E” on your income statement.
- The ATO checks the 10% threshold test: the lump sum must be at least 10% of your taxable income for the year after deducting the lump sum itself (and any termination leave payments or ETPs).
- If you pass, the ATO compares the extra tax caused by receiving the lump sum this year against the tax you’d have paid if you’d received it in the earlier years.
- The difference is granted as a tax offset, which appears on your notice of assessment.
The offset is calculated automatically by the ATO when you lodge — you don’t apply separately. But you need the payment reported as Lump Sum E and to provide a schedule of the financial years the payment relates to (Item 24 of the supplementary tax return, or the “Other income” section in myTax).
LSPIA worked example
Take Emma, earning $90,000 in 2025–26, who receives $15,000 in back pay relating to underpayments of $5,000 in each of the previous three years. The $15,000 passes the 10% threshold test (10% of $90,000 is $9,000). Without the offset, the extra $15,000 would be taxed at her marginal rate of 30% plus 2% Medicare levy — about $4,800. With the LSPIA offset, the ATO treats it as $5,000 extra in each of the three prior years, when those slices would have been taxed at lower effective rates. The offset wipes out the difference, potentially saving her over $1,000.
Important caveat: the offset is often $0 if the lump sum would have fallen in the same tax bracket in the earlier years. The offset only helps when bunching the payment into one year actually pushed you into a higher rate.
Redundancy and termination payments: ETP tax rates
A redundancy payout isn’t one payment for tax purposes — it’s a bundle of different payments, and each component is taxed differently. Getting the breakdown right matters enormously.
Tax-free genuine redundancy amount
If your redundancy is genuine — your role was abolished, you’re under age 67, and you didn’t resign or get sacked for performance — part of the payment is completely tax-free. For 2025–26 the tax-free limit is:
$13,100 base amount + $6,552 for each completed year of service
So with 10 completed years of service, the first $78,620 of a genuine redundancy payment is tax-free. With 5 years, it’s $45,860. This tax-free amount is reported as Lump Sum D and doesn’t count as assessable income at all.
Employment termination payments (ETPs)
The part of a genuine redundancy payment above the tax-free limit — plus payments like golden handshakes, severance pay and payments in lieu of notice in a non-genuine redundancy — is an employment termination payment (ETP). ETPs get concessional flat tax rates up to the ETP cap of $260,000 for 2025–26:
| Your age | Tax rate up to ETP cap ($260,000) | Above the cap |
|---|---|---|
| Below preservation age (60 for most people) | 30% + 2% Medicare levy = 32% | 45% + 2% Medicare levy = 47% |
| At or above preservation age (60) | 15% + 2% Medicare levy = 17% | 45% + 2% Medicare levy = 47% |
There’s also a whole-of-income cap of $180,000 (not indexed) that can reduce how much of certain ETPs qualifies for the concessional rate if your other income for the year is high — it effectively means high earners may have less of their payment concessionally taxed. If your redundancy includes a large ETP, it’s worth modelling the tax on a redundancy payout before you sign a deed of release.
Unused leave paid out on termination
Accrued annual leave and long service leave paid out when you leave are not part of the tax-free genuine redundancy amount and are not ETPs. They’re taxed at your marginal rate, with a tax offset capping the effective rate at 30% plus Medicare levy. One more wrinkle: if your unused leave relates to pre-1993 service, concessional treatment can apply to some components — uncommon today, but worth asking your accountant about if you have very long service.
Lump sum types at a glance
| Type | Examples | How it’s taxed (2025–26) |
|---|---|---|
| Ordinary lump sum | Bonuses, commissions | Marginal tax rate + 2% Medicare levy |
| Lump Sum E (arrears) | Back pay | Marginal rate, but LSPIA offset if ≥10% of income |
| Lump Sum D (genuine redundancy) | Tax-free redundancy amount | Tax-free up to $13,100 + $6,552/yr of service |
| ETP | Severance, golden handshake, excess redundancy | 32% (under 60) or 17% (60+) up to $260,000 cap; 47% above |
| Lump Sum A (leave on termination) | Unused annual/LSL paid out | Marginal rate, capped at 32% via offset |
How to reduce tax on a lump sum
- Check the reporting code. Make sure back pay appears as Lump Sum E and redundancy components are split correctly on your income statement. Wrong coding means a wrong tax outcome.
- Time the payment if you can. A lump sum received just after 30 June is assessed in the next financial year — useful if you’re expecting lower income next year (for example, during parental leave or retirement).
- Salary sacrifice into super. If you receive a bonus while still employed, asking your employer to salary sacrifice some or all of it into super means it’s taxed at 15% contributions tax instead of your marginal rate — but it counts toward the $30,000 concessional contributions cap, and Division 293 adds another 15% if your income plus concessional contributions exceeds $250,000.
- Prepay deductible expenses. Work-related expenses prepaid before 30 June can offset the extra income from a lump sum received this year.
- Get hospital cover. If a lump sum pushes your income for MLS purposes over $101,000 (2025–26 singles threshold), basic private hospital cover can save you the 1–1.5% Medicare levy surcharge.
FAQs
Do I pay more tax if a bonus pushes me into a higher tax bracket?
No — Australia has marginal tax rates, so only the dollars above the bracket threshold are taxed at the higher rate. Your whole bonus isn’t taxed at the higher rate, just the portion that falls in the higher bracket.
Is back pay taxed in the year I receive it or the year I earned it?
It’s assessable in the year you receive it. However, if it qualifies as a lump sum payment in arrears (reported as Lump Sum E and at least 10% of your income), the LSPIA tax offset effectively gives you the benefit of having been taxed in the earlier years.
How is a redundancy payout taxed in Australia?
It’s split into components: a tax-free amount if the redundancy is genuine ($13,100 + $6,552 per year of service in 2025–26), the excess taxed as an ETP at concessional rates (32% under 60, 17% at 60+ up to the $260,000 ETP cap), and unused leave taxed at marginal rates capped at 32%.
What is the ETP cap for 2025–26?
$260,000. ETP amounts up to this cap get the concessional 32%/17% rates; amounts above it are taxed at the top marginal rate of 45% plus the 2% Medicare levy.
Can I salary sacrifice a bonus into super to save tax?
Yes, if your employer agrees and the arrangement is in place before you earn the bonus. The sacrificed amount is taxed at 15% inside super instead of your marginal rate, but it counts toward the $30,000 annual concessional cap.
Will my lump sum affect my HECS repayment?
Yes. A lump sum increases your repayment income for the year, which can push you into a higher HECS repayment rate — the minimum threshold is $67,000 for 2025–26. Factor this in if you have a study debt.
The bottom line
Lump sums are taxed on top of your ordinary income, which is why they so often produce surprise tax bills — or surprise refunds. Bonuses are taxed at your marginal rate with withholding that’s only an estimate; back pay may qualify for the LSPIA offset that taxes it as if you’d received it on time; and redundancy payouts split into tax-free, concessional ETP and ordinary components under 2025–26 caps of $260,000 and $180,000.
Before you spend a lump sum, run the numbers: estimate the tax on a bonus, model a redundancy payout, or check your total tax position with the income tax calculator. Five minutes of modelling now beats an unexpected ATO bill in July.