If you're receiving an employment termination payment in the 2026–27 financial year, the taxable component is taxed concessionally at 17% if you're at or above preservation age, or 32% if you're below it, up to whichever cap applies to your payment. The ETP cap sits at $270,000, the whole-of-income cap stays fixed at $180,000, and anything above your applicable cap gets taxed at the top marginal rate plus the Medicare levy, roughly 47% combined.
TL;DR:
- The employment termination payment cap for 2026–27 remains at $270,000, but is reduced by previous ETP payments and not indexed annually.
- The whole-of-income cap varies each year, calculated as $180,000 minus your other taxable income, to determine the concessional tax rate.
- Excluded payments, such as genuine redundancy and invalidity payments, are only subject to the ETP cap, while non-excluded payments are capped by the smaller of the ETP or whole-of-income cap.
- The correct tax rate depends on your age relative to preservation age, with 17% taxed for those above and 32% below, plus additional tax on amounts exceeding the cap.
- Employers withhold taxes based on these caps and rates, but actual liability is settled after assessing total yearly income, requiring careful review of PAYG summaries and total earnings.
Table of Contents
- At-a-glance numbers: the 2026 caps and rates
- Which cap applies: excluded payments vs non-excluded payments
- How the whole-of-income cap works and why other income matters
- Tax-free elements, excluded amounts and common gotchas
- Withholding and PAYG treatment: what employers withhold and what you might owe
- Worked example: how an ETP is taxed in 2026–27
- What to do next: checking your PAYG summary and when to get advice
- Official references and tools
- Author perspective from Amber Wealth: integrating ETPs into retirement planning
At-a-glance numbers: the 2026 caps and rates
Before you dig into the detail, here's the reference sheet worth bookmarking.
- ETP cap (2026–27): $270,000 — indexed annually against Average Weekly Ordinary Time Earnings (AWOTE) and rounded down to the nearest $5,000.
- Whole-of-income cap: $180,000 — fixed, never indexed, and calculated differently to the ETP cap.
- Concessional rate at/above preservation age: 17% (including Medicare levy).
- Concessional rate below preservation age: 32% (including Medicare levy).
- Excess above the relevant cap: 47% total (top marginal rate plus Medicare levy).
The number that catches most people out isn't the ETP cap. It's the whole-of-income cap, because it shrinks the moment you've earned other income during the year, and it doesn't index the way the ETP cap does. The exact mechanics of how the ATO sets these figures each year are explained in Schedule 11 – Tax table for employment termination payments, which every employer's payroll system is built around.
Which cap applies: excluded payments vs non-excluded payments
Not every termination payment is treated the same way, and this is where a lot of confusion starts.
Excluded payments are subject only to the ETP cap. These include:
- The tax-free part of a genuine redundancy payment above the standard threshold amounts
- Genuine invalidity payments
- Certain death benefit ETPs paid to a dependant
Non-excluded payments, by contrast, are capped by whichever is smaller: the ETP cap or the whole-of-income cap. Common examples include a negotiated "golden handshake," a payment in lieu of notice, or unused rostered days off bundled into a termination package.
The rule that trips people up most: your ETP cap isn't a fresh $270,000 every time. If you've received an earlier ETP for the same termination, or multiple payments across the same employment ending, the cap gets reduced by what you've already received. Applying the ETP caps sets out exactly how that reduction is calculated.
How the whole-of-income cap works and why other income matters
The whole-of-income cap isn't a flat number you can just apply. It's calculated as $180,000 minus your other taxable income for that income year, excluding the ETP itself.
That means the more you've earned before your termination, whether from wages, investment income or a new job started partway through the year, the smaller the concessional slice of your ETP becomes. Employers signal this with PAYG codes O or P on your payment summary, and seeing either code is your cue to add up total income for the year before assuming the full 17% or 32% rate applies to the whole payment.
Picture someone who's earned $120,000 in salary before their termination. Their whole-of-income cap drops to $60,000, meaning only that first $60,000 of their non-excluded ETP gets the concessional rate. Everything past it is taxed at 47%.
Tax-free elements, excluded amounts and common gotchas
Some parts of an ETP escape tax altogether. The tax-free elements include:
- Payment for pre-1983 service
- Genuine invalidity payment components
- The tax-free part of a genuine redundancy or early retirement scheme payment
It's also worth knowing what isn't an ETP at all. Unused annual leave, for instance, is taxed under separate rules and never counts toward your ETP cap. How ETP components are taxed breaks down the full list.
The most expensive mistake taxpayers make is forgetting that earlier payments reduce the current ETP cap, which can push a much bigger chunk of a second payment into the 47% bracket than expected.
Pro Tip: If you're researching "ETP tax" online, double check you're not reading about exchange-traded products by mistake. Same acronym, completely different topic, and it's a surprisingly common mix-up in search results.
Withholding and PAYG treatment: what employers withhold and what you might owe
Your employer doesn't guess at withholding. They follow Schedule 11, which sets out exact percentages and rounding rules for payments made from 1 July 2026 onward.
In practice:
- Amounts up to your relevant cap are withheld at the concessional rate (17% or 32%, inclusive of Medicare levy)
- Amounts above the cap are withheld at 47%
- If you haven't provided a Tax File Number, your employer must withhold at the top rate, 47%, on the entire payment regardless of the cap
Withholding is provisional, not final. Your actual tax liability gets settled at assessment time, once your full income for the year, including the ETP, is known. If the amount withheld looks off against what you'd expect from these rates, check your PAYG payment summary against your own income figures, and raise it with a tax agent if the numbers don't reconcile.
Worked example: how an ETP is taxed in 2026–27
Take a simplified case: a 58-year-old (above preservation age) receives a $200,000 non-excluded ETP after being let go, with no other income that year.
- Whole-of-income cap check: with no other income, the cap sits at the full $180,000.
- Cap comparison: the ETP cap is $270,000, so the smaller cap, $180,000, applies.
- Concessional portion: the first $180,000 is taxed at 17%, roughly $30,600.
- Excess portion: the remaining $20,000 is taxed at 47%, about $9,400.
- Total tax: approximately $40,000, leaving $160,000 after tax.
Now change one variable: if that same person had earned $100,000 in wages before termination, their whole-of-income cap drops to $80,000.
These figures are illustrative only. Your actual position depends on preservation age, prior payments, and total income, so run the real numbers before assuming either scenario applies to you.
What to do next: checking your PAYG summary and when to get advice
Start with a simple checklist:
- Confirm the PAYG code on your payment summary, particularly whether it's O or P
- Gather every payslip and payment summary connected to the termination, including any earlier ETPs from the same employer
- Add up your total taxable income for the year to estimate your real whole-of-income cap
- Cross-check withholding against the ETP cap table before assuming the withheld amount is your final tax
If your termination involves multiple payments, redundancy alongside a separate ETP, or interacts with Age Pension eligibility, that's the point to bring in a tax agent or financial adviser rather than guessing. A retirement planning review can model how the payment fits your broader super and cashflow position.
Official references and tools
For the primary sources behind every figure in this article, start with the ATO's Schedule 11 withholding table and its guidance on applying the ETP caps. Indexed cap amounts are usually published each February, so check back around that time if you're planning a termination for the following financial year. Keep every PAYG summary and employer letter relating to the payment. You'll need them if a tax agent has to reconcile withholding against your actual liability later.
Author perspective from Amber Wealth: integrating ETPs into retirement planning
An ETP rarely arrives in isolation. It lands alongside decisions about superannuation contributions, Centrelink timing, and how quickly you draw down savings in retirement, and treating it as a one-off cheque misses the bigger picture entirely.
When we model a termination payment for a client, the tax outcome is only half the exercise. The other half is whether that payment should go straight into super, offset a mortgage, or fund an income gap before the Age Pension kicks in. Get the sequencing wrong and you can lose more to Centrelink deeming rules than you ever would to the ATO.
If you're facing a termination payment and want it modelled properly against your retirement plan, book a personalised review with our team.
— Adam
Amber Wealth Pty Ltd (ABN 16 653 279 013) is a Corporate Authorised Representative (No. 1310815) of Lifespan Financial Planning Pty Ltd (ABN 23 065 921 735), holder of Australian Financial Services Licence (AFSL) No. 229892. Financial advice is provided by Adam Sobczak, ASIC Authorised Representative No. 1234769.
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