ETP Tax Calculator Australia (FY 2025-26): How Much Tax Will You Pay?

Receiving an Employment Termination Payment (ETP) can be a significant financial event, whether it's from redundancy, retirement, or leaving a job. Unlike regular income, ETPs receive special tax treatment in Australia — but the rules can be confusing. This guide breaks down exactly how ETPs are taxed in FY 2025-26, who qualifies for concessional rates, and how to estimate what you'll actually take home after tax.

What Is an Employment Termination Payment (ETP)?

An Employment Termination Payment, or ETP, is a lump sum payment you receive when your employment ends. The ATO has specific rules about what qualifies as an ETP, and not all termination payments fall into this category. Common types of ETPs include payments for unused rostered days off, payments in lieu of notice (if not taxed as ordinary income), gratuities or golden handshakes, and certain payments made after termination due to a disability or death.

It's important to understand that not all money you receive when leaving a job is an ETP. For example, unused annual leave and long service leave are taxed as ordinary income at your marginal rate, not as ETPs. Similarly, genuine redundancy payments have their own special tax treatment, with a tax-free component based on your years of service. Knowing which part of your payout is an ETP matters because it determines the tax rate that applies.

The ATO treats ETPs more favourably than ordinary income because they recognise that these payments often represent compensation for lost employment or long service. This concessional treatment means you may pay significantly less tax on an ETP than you would on the same amount of salary — but only up to certain caps and subject to your age and other factors.

ETP Tax Rates for FY 2025-26

The tax rate applied to your ETP depends on two key factors: your age at the end of the financial year in which you receive the payment, and whether the amount falls within the ETP cap. The ATO sets these caps to limit how much of your termination payment receives concessional tax treatment. For FY 2025-26, the ETP cap is $235,000 — this figure is indexed annually and represents the maximum amount that can be taxed at the concessional rates.

For ETP amounts up to the cap, the tax rates are considerably lower than standard marginal rates. If you're under 55 at the end of the income year, the maximum tax rate is 32% (including the 2% Medicare levy). If you're 55 or older, you benefit from an even lower rate of just 17% (15% plus 2% Medicare levy). These rates apply regardless of what your normal marginal tax rate would be — so even if you're a high-income earner who normally pays 45% tax, your ETP up to the cap is capped at these concessional rates.

Any portion of your ETP that exceeds the $235,000 cap for FY 2025-26 is taxed at your top marginal rate plus the Medicare levy — which could be as high as 47% for very high earners. This makes it important to understand exactly how much of your payment falls within the cap, especially if you're receiving a large termination package.

Worked Example: Calculating Tax on an ETP

Let's walk through a practical example to see how ETP tax calculation works in practice. Imagine Michael, aged 52, receives an ETP of $80,000 when his employment is terminated in March 2026. This payment represents a gratuity for his years of service. Because Michael is under 55 at the end of the financial year, the 32% tax rate applies to his entire ETP (since it's well under the $235,000 cap).

Michael's tax on the ETP would be $80,000 × 32% = $25,600. This means he takes home $54,400 from the ETP. Compare this to if the same amount were taxed as ordinary salary — at Michael's marginal rate of 30% plus 2% Medicare, plus the impact on his total taxable income, he would likely pay similar or more tax, but the ETP treatment ensures the rate cannot exceed 32% regardless of his other income.

Now consider a higher ETP amount. David, age 50, receives a golden handshake of $300,000. The first $235,000 is taxed at 32% ($75,200), while the remaining $65,000 above the cap is taxed at David's top marginal rate of 37% plus 2% Medicare (39%), which equals $25,350. David's total tax is $100,550, leaving him with $199,450. Understanding the cap is crucial for planning, as the tax rate jumps significantly on amounts above $235,000.

How ETPs Interact with Other Tax Obligations

One important aspect of ETPs is how they interact with other parts of the Australian tax system. Unlike some other termination payments, ETPs do not count as ordinary income for most purposes. This means they are not included in your assessable income when calculating the Medicare Levy surcharge thresholds — though the Medicare levy component is already built into the ETP tax rates quoted above. Similarly, ETPs are excluded from your repayment income for HECS-HELP purposes.

This exclusion from HECS repayment income can be significant if you have a student debt. Even a large ETP won't trigger compulsory HECS repayments or increase your existing repayment amount. However, be aware that other components of your termination package — such as unused annual leave paid out — are treated as ordinary income and do count toward HECS repayment calculations. If you're receiving multiple types of payments, it's worth checking the total impact using our HECS-HELP Calculator.

ETPs also do not attract superannuation guarantee contributions. Your employer is not required to pay SGC on any part of an ETP, which is one reason these payments are treated concessionally for tax purposes. If you're considering making voluntary super contributions with your ETP proceeds, remember that the concessional contributions cap for FY 2025-26 is $30,000, and personal deductible contributions may be subject to your total super balance and other eligibility requirements.

ETPs vs Genuine Redundancy: Understanding the Difference

It's common to confuse ETPs with genuine redundancy payments, but they have quite different tax treatments. A genuine redundancy occurs when your employer dismisses you because your position is no longer required — not because of personal performance issues. Genuine redundancy payments receive even more favourable tax treatment than ETPs, with a tax-free component calculated as $12,524 plus $6,264 for each completed year of service (FY 2025-26 figures).

If your redundancy payment exceeds the tax-free threshold, only the excess amount is treated as an ETP and taxed at the ETP rates described above. This means genuine redundancy payments can be significantly more tax-effective than standalone ETPs. For example, someone with 10 years of service could receive $75,164 completely tax-free as a genuine redundancy payment before any ETP tax rates apply. You can learn more about redundancy tax treatment and calculate your tax-free amount using our dedicated resources.

The key difference is that genuine redundancy requires your role to be eliminated, not just your employment. If you resign, retire, or are dismissed for performance reasons, your payment will likely be treated as an ETP rather than qualifying for the redundancy tax concessions. Understanding which category applies to your situation is essential for accurate tax planning and ensuring you don't overpay.

Tips for Managing Your ETP and Tax Planning

If you know you're going to receive an ETP, there are several strategies to consider for managing the tax impact. Timing can be important — if you have some control over when the payment is made, consider how it interacts with your other income for the year. While the ETP tax rate is capped, the payment may still push your total income into a higher bracket for other purposes, such as private health insurance rebate entitlements or certain offsets.

Consider whether salary sacrifice opportunities in your final months of employment could reduce your taxable ordinary income, offsetting some of the income from leave payouts that are taxed at marginal rates. However, remember that ETPs themselves cannot be salary sacrificed into super — they must be taken as cash. You can explore how salary sacrifice affects your overall tax position using our Salary Sacrifice Calculator.

Finally, keep detailed records of all payments you receive when leaving employment. Your employer must provide a breakdown showing which amounts are ETPs, which are ordinary income (like annual leave), and which are tax-free redundancy amounts if applicable. This documentation will be essential when lodging your tax return and ensuring the ATO applies the correct tax treatment to each component.

Summary: Key Takeaways for ETP Tax in FY 2025-26

• ETPs are taxed at concessional rates: 32% if under 55, or 17% if 55 and over (including Medicare levy)
• The ETP cap for FY 2025-26 is $235,000 — amounts above this are taxed at your top marginal rate
• ETPs do not count toward HECS-HELP repayment income or Medicare Levy Surcharge calculations
• Employers do not pay superannuation guarantee on ETP amounts
• Genuine redundancy payments have a separate, more generous tax-free threshold before ETP rates apply
• Unused annual leave and long service leave are taxed as ordinary income, not as ETPs
• Your employer must provide a payment summary breaking down the ETP components for your tax return

This article is for general information only and does not constitute tax advice. Tax rules are complex and individual circumstances vary. Please consult a registered tax agent or financial adviser for advice specific to your situation. All figures are based on ATO guidelines for FY 2025-26.