"Under current tax law, lower and middle-income people can be over-taxed when their redundancy pay pushes them into a higher tax bracket," Finance Minister Michael Cullen and Revenue Minister Peter Dunne explained on Tuesday.

"Redundancy payments are employment income, and it is fair that they are taxed. However, taxing these payments at a higher rate of tax without taking into consideration the recipient's personal tax rates before and after redundancy has led to many cases of over-taxation. When that happens it can come at what is already a very difficult time for most people," they continued, adding:

"To resolve the problem, and to keep complexity and compliance costs to a minimum, the government is introducing a simple tax rebate that will apply to redundancy payments made on or after 1 December 2006. "

The Ministers explained that: "Calculation of the rebate will be based on the flat rate of six cents per dollar, up to $60,000 per redundancy. That means, for example, that someone who receives a redundancy payment of $20,000 will be able to claim a $1,200 rebate. Someone who receives a $60,000 payout can claim a rebate of $3,600."

"Because the maximum redundancy payout that qualifies for a rebate is $60,000, the rebate itself is capped at $3,600, so someone who receives a payout larger than $60,000 will be eligible for a $3,600 rebate."

"The process for obtaining a rebate will be straightforward. Once the system is in place, from 1 April next year, recipients will be able to claim a rebate immediately after receiving their redundancy payout by completing an Inland Revenue form. Over time an automated system will be developed to reduce compliance costs further."

"The government is pleased to have found a solution to a complex tax problem that has been of concern to workers and unions for some time. The changes announced today will make help to make the taxation of redundancy pay fairer to all concerned," the Ministers concluded.

The changes are being added to the taxation bill currently before Parliament by means of supplementary order paper No. 167, which was released on Tuesday.