Parental leave: What You Don’t Expect When You’re Expecting
When the fine print really matters
We’re yet to meet an expecting parent who gets a kick out of navigating government policy, employment contracts and eligibility criteria, not to mention the unexpected curveballs in the legislation. But the fine print does matter when it comes to parental leave.
We’ve spent a lot of our time reading the Parental Leave and Employment Protection Act 1987 and talking to parents about the things that caught them off guard.
These are the most common curveballs Kiwi parents face, and our suggestions of how you can play them, one by one.
Meeting the eligibility criteria for parental leave
Timing your pregnancy very rarely goes to plan!
The curveball:
The rules that determine your access to time off are different to the rules that determine your access to government payments. You could be eligible for 26 weeks of parental leave payments from the government, but not the time off to receive it (yes, you read that right).
You need to meet the eligibility requirements as either an employee or a self-employed person. You can’t combine your self-employment with your other employment. And if you’re an employee, you need to be at the same employer for 12 months or more to be eligible for 12 months of parental leave.
How you can play it:
If you’re thinking about having a child and you’re planning your next job move, make sure you understand the rules. We break them down here with our friends at Paysauce, and we’ve created an easy-to-use tool so you can figure out what you’re entitled to.
Meeting the eligibility criteria for parental leave again
We repeat: timing your pregnancy very rarely goes to plan!
The curveball:
You can take parental leave more than once, but you need to have been back at work for 6 months to be eligible for 6 months of parental leave for each child (or 12 months to be eligible for 12 months of parental leave). Even if you’ve worked for the same employer for years, you must meet the eligibility requirements each time.
So, say you take 12 months of parental leave for your first baby, and 10 months into your leave, you discover you're pregnant again. Since you won’t have been back at work for at least 6 months by the time your second baby is due, you won’t be eligible for government-paid parental leave or parental leave from your employer for your second child. You could apply for negotiated carer leave to take time off to care for your second baby.
How you can play it:
If you’re planning to have children in quick succession or you fall pregnant on parental leave, you might consider how long you take off for the first child so that you have the time you want with your second child. This might mean sacrificing a bit of time now to reap the benefits later on.
Getting bang for your buck on your annual leave
While you’re on parental leave, you continue to accrue annual leave. But…
The curveball:
There’s a specific carve-out in the legislation that means if you take annual leave after returning from parental leave, the amount your employer pays you at the time you take annual leave could be lower than your usual salary or wage rate - ouch. You can find a detailed explanation in our article Paycheck Surprise: The Impact of Parental Leave on Annual Leave in New Zealand.
How you can play it:
Check your employer’s policy - some employers pay annual leave at the higher of your ordinary weekly earnings or average weekly earnings as soon as you return from parental leave
Chat with your HR or payroll team or contact Employment New Zealand before going on parental leave - the calculations for annual leave payments can be complicated. If your average weekly earnings before you go on parental leave will be higher than your average weekly earnings for up to a year after you return to work, it may make financial sense for you to request to take annual leave in advance of entitlement before going on parental leave. There may be non-financial reasons you want to retain some or all of your annual leave balance, for example, peace of mind that you have the ability to take time off in the form of annual leave up your sleeve upon your return, even if it will be paid at a lower rate.
Talk to your employer - some employers don’t realise there’s a carve-out for parental leave in the legislation and are open to paying the higher rate.
What happens to your KiwiSaver contributions
By default, KiwiSaver contributions are not deducted from Government parental leave payments.
The curveball:
That also means your employer’s contributions stop, and if your KiwiSaver contributions are less than $1,046 for the year by 30 June, you won’t be maximising government matching from Member Tax Credit (free money!). It’s a triple financial whammy.
How you can play it:
From 1 July 2024, the government started making the equivalent of KiwiSaver employer contributions on parental leave payments, provided you opt-in to make KiwiSaver contributions (85% of recipients don’t).
A growing number of employers are continuing to contribute to their employees’ KiwiSaver while they’re on parental leave, so it pays to check your employer’s policy or chat with your manager about it.
In addition, you can make voluntary KiwiSaver contributions while on parental leave - something perhaps for you and your partner to discuss. Check out our guide to Bridging the KiwiSaver Gap to learn more.
Tax on employer top-ups
Some employers top up employees’ income while they’re on parental leave.
The curveball:
Since you’ll be receiving two sources of income - one from your employer and one from the government - you’ll need to allocate a secondary tax code to one of the sources to avoid a tax bill at the end of the year. The tax codes help your employer and the government work out how much tax to deduct from your pay.
How you can play it:
When you apply for paid parental leave, you can indicate what tax rate is applicable. The IRD suggests that whichever payment is smaller should be taxed at the secondary rate. Learn more about how to avoid parental leave-related tax surprises in our article Onside With The IRD: Preventing Tax Woes on Parental Leave.
Using Keeping In Touch (KIT) hours for extra income
At last, a positive surprise - you can get paid your normal working wage for up to 64 hours of work for your employer during the 26 weeks that you’re receiving parental leave payments from the government.
The curveball:
Your employer must agree to let you use KIT hours. In addition, KIT hours cannot be used within the first 28 days after your baby is born.
If you work more than 64 hours during your 26-week paid parental leave period, the government considers you to have returned to work and will cease your parental leave payments.
How you can play it:
You and your employer need to discuss what kind of activities are considered reasonable for KIT hours, ideally before you go on parental leave. Your KIT hours should contribute to your transition back to work. While relevant activities will vary depending on your position, industry and type of business, common examples include:
Refreshing your skills
Catching up with colleagues and meeting new members of the team
Being involved in decisions that impact your role
Becoming familiar with new processes and procedures
Preparing for any changes to the organisation happening in the near future
We saved the best for last…
One more positive surprise - all families, regardless of income, receive $73 per week tax-free for the first year of their child’s life via the New Zealand government’s Best Start program. These payments start after your parental leave payments stop, and the easiest way to apply for Best Start is when you register your child's birth.
So, if you take 12 months of parental leave and receive paid parental leave from the government for the first 26 weeks, you’ll get the Best Start payments for the last 26 weeks.
How you can play it:
Most people don’t realise this is a benefit they’re entitled to receive. This money can ease the financial burden if it’s spent wisely. Be really thoughtful about how you use this. If you can spare the money, do something smart with it, like paying down debt or putting it towards an investment fund. Check out our guide on investing in shares for your kids.
In addition, you may still be eligible for Best Start payments when your child is between the age of 1 and 3, depending on your family income. Make sure you submit the right income estimate to the IRD, so your positive surprise doesn’t become a negative one. Learn more in our article Onside With The IRD: Preventing Tax Woes on Parental Leave.
New parenthood is filled with unknowns. Our hope is that we’ve demystifyed the common financial pitfalls parents find themselves in so you can enter this next phase with confidence.
Now for the important legal part: The information we provide is general and not regulated financial advice for the purposes of the Financial Markets Conduct Act 2013. Please seek independent legal, financial, tax or other advice in considering whether the content in this article is appropriate for your goals, situation or needs. The information in this article is current as at 17 September 2024.
Stephanie Pow
Founder and CEO, Crayon