How to make the most of your annual leave before (and after) parental leave
A little planning around your annual leave can make a big difference to your income. Here are five smart strategies to help you get the most out of your leave entitlements — and reduce financial stress in a time of big change.
Note: Calculations surrounding annual leave and parental leave can be complex, and every situation is unique. You can request to take annual leave in conjunction with parental leave, subject to employer approval. Employers must consider such requests in good faith but are not obligated to grant them.
We strongly recommend consulting with your payroll or HR team to discuss your specific circumstances.
1. Calculate if using annual leave before parental leave could be worth more to you
Depending on when you use your annual leave, it could be paid at a higher or lower rate. Here’s why:
If you take annual leave after parental leave that you became entitled to during parental leave or in the 12 months after your return to work, your employer can legally pay you based on your average weekly earnings, which includes any time taken on unpaid leave. See: The impact of parental leave on annual leave.
Some employers choose to pay you your full ordinary rate regardless, but you’ll need to check their policy. Even if this is the case, there may still be additional considerations:
If your compensation includes bonuses, overtime, or other variable components, your average weekly earnings may be higher than your ordinary weekly pay. Taking annual leave before parental leave can be more financially advantageous, as it will be calculated based on these additional earnings.
Note: Whether bonuses are included in ordinary weekly pay and average weekly earnings depends on several factors (refer to this flow chart or consult with your payroll team).
If your pay is primarily fixed and you received a substantial pay rise during parental leave, your ordinary weekly pay might be higher upon your return, making it more beneficial to take leave after you resume work.
If you return part-time, your remaining leave balance may be recalculated to reflect your reduced hours. See: How annual leave works when an employee returns part-time after parental leave.
The takeaway: Calculations for annual leave payments can be complex, so consult with your HR or payroll team or contact Employment New Zealand.
The law allows you to start paid parental leave after the arrival of your child if you are taking paid leave (such as annual leave or days-in-lieu) immediately beforehand. In some circumstances, you may get more value by using your annual leave before your parental leave starts.
2. Plan around public holidays to stretch your pay
Annual leave taken near public holidays can go further, especially around long breaks like Christmas or Easter.
Example:
Baby due: 3 January 2024
You take 5 days of annual leave starting 22 December 2023
Those 5 days cover: 22, 27, 28, 29 Dec and 3 Jan
You’re also paid for public holidays: 25 & 26 Dec, 1 & 2 Jan
Result: You're paid for 9 days using only 5 days of annual leave.
If your due date or placement date is around a cluster of public holidays, plan ahead using the official New Zealand public holidays calendar.
3. Consider cashing out leave for upfront cash flow
In New Zealand, you can request to cash out up to one week of annual leave per year if your employer agrees. This could provide you with extra income upfront, especially when setup costs tend to be high.
4. Ease your return to work with annual leave
Returning to work is a big shift, and annual leave can help make it smoother.
Ideas to consider:
Gradual return: Use annual leave to supplement part-time hours, allowing you to receive full-time pay. This gives both you and your baby time to adjust to new routines. Securing your preferred days at daycare can be challenging, and you may need to pay for full-time daycare even before returning to full-time hours.
Trial runs: Take annual leave to test daycare, your commute, and your new routine.
Buffer days: Reserve some annual leave for those inevitable illnesses when daycare starts and you’ve drained your sick leave balance
Note: If you're using annual leave soon after returning, check how it will be paid — it may be based on your reduced average earnings. See: The impact of parental leave on annual leave.
5. Combine with employer-paid parental leave
If your employer offers paid parental leave, you may be able to combine it with annual leave to maximise the time you’re paid at your full salary before transitioning to government support.
Review your workplace policy to clarify how leave types interact, ensuring there are no unintended gaps or overlaps. If you’re receiving more than one stream of income at the same time, such as annual leave and government-paid parental leave, you may need to apply a secondary tax rate to avoid a later tax bill.
Final thoughts
The way you time your annual leave can significantly impact your financial well-being during parental leave. A few smart decisions now can help reduce stress later.
Plan ahead
Check how your leave will be paid
Map public holidays
Talk to HR or your manager early
Effective communication with your employer is crucial when planning parental leave and annual leave.
If you have any questions, please refer to the Employment New Zealand website or contact your HR department or manager.
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 3 Jun 2025.
Stephanie Pow
Founder and CEO, Crayon