Categories
Redundancy

Tax Treatment of Termination of Employment Payments

mployment awards taxation

Certain payments made to you on the termination of your employment may be exempt from tax. Let’s say you have been made redundant and you are being offered a termination/severance package and agreement.

This type of agreement will typically include 4 types of payment:

  1. Statutory redundancy payments  
  2. Ex gratia severance payments from an employer
  3. Notice pay
  4. Holiday pay

Notice pay and holiday pay is fully taxable in the normal way.

i) Statutory Redundancy payments

Statutory redundancy payments are tax free.

Statutory redundancy is calculated as follows

  • Two weeks’ pay for each year of reckonable service between ages of 16 and 66, plus one extra week, subject to a maximum weekly payment of €600.

ii) Ex gratia payments from employers

There is a basic tax free exemption on ex-gratia payments received from the employer. 

The basic exemption starts at €10,160 + €765 for each completed year of service. 

The basic exemption may be increased by €10,000 IF 

(a) the employee has not in the previous ten years claim any benefits under section 201 Tax Consolidation Act 1997 and 

(b) the employee is not a member of a occupational pension scheme, or if a member the employee has irrevocably given up the right to receive a lump sum from the scheme.

Standard Capital Superannuation Benefit (SCSB)

This is an additional benefit an employee may be entitled to and benefits long serving employees with high earnings. It is calculated using the formula 

(A x B) /15 – C

Where 

A = 12 months average of the remuneration from the last three years

B = Number of completed years of service 

C=Any tax free lump sum received or receivable under the employer pension scheme.

Takeaway

If you are receiving a significant sum of money by way of a termination payment arising from the termination of your employment I would strongly recommend that you obtain taxation advice. Failure to do so could lead to an unpleasant surprise and a tax liability.