Are you getting a redundancy package? Or perhaps you are retiring?
Most payments from employers to employees are taxable; but there is a special tax treatment for lump sum payments on a redundancy or retirement.
Statutory redundancy payments are exempt from tax.
Tax relief
There is some tax relief for
- salary or wages in lieu of notice, on redundancy or retirement and
- ex gratia payments, sometimes known as ‘golden handshakes’.
First claim
On an employee’s first claim he/she may be entitled to the following exemptions:
- a basic exemption
- an increased exemption
- an increase for Standard Capital Superannuation Benefit (SCSB).
Basic exemption
The basic tax exemption in this circumstance is €10,160 plus €765 for each year of full service with the employer making the redundancy payment.
Increased exemption
There is an increased exemption of €10,000 if the employee is not a member of an occupational pension scheme or gives up the right to receive a lump sum from a pension scheme and he/she has not made a claim in respect of a lump sum in the previous 10 tax years.
If the employee is in an occupational pension scheme the increased exemption of €10,000 is reduced by the amount of any tax free lump sum from the pension scheme or the present day value at the date of leaving employment of any tax free lump sum which may be receivable from the pension scheme in the future.
Standard Capital Superannuation Benefit (SCSB)
This relief generally benefits those with high earnings and long service. It is calculated by multiplying 1/15th of the average annual pay for the last 3 years of service by the number of years of complete service less any tax-free lump sum entitlement.
The formula is A X B/15-C where
A is the average annual remuneration for the last 3 years (this remuneration figure includes salary and benefits in kind, less Revenue agree flat rate expenses)
B is the number of years of complete service
C is the value of any tax free lump sum received or receivable under an approved pension scheme.
C cannot exceed €200,000.
Maximum relief available over a lifetime
Since 2011 there is a lifetime limit of €200,000 in resepect of all ex-gratia payments received.
Conclusion
An employee needs to be careful when receiving lump sum payments from the employer, regardless of whether the employee is settling an employment claim, being made redundant, retiring, or some other reason.
Unless he is absolutely confident about the tax treatment of the payment it makes a great deal of sense to obtain professional taxation advice from either an accountant or tax consultant.
Here is a useful Revenue guide to the treatment of lump sums on retirement or redundancy, with worked examples.