The tax im­pli­ca­tions from re­dun­dancy

Bray People - - OPINION -

Q . MY COM­PANY has just an­nounced that it is mak­ing re­dun­dan­cies and my job is one that is to be cut. Will I have to pay tax on my re­dun­dancy pay­ment and, if I do, how much? A . I am very sorry to hear that your po­si­tion is be­ing made re­dun­dant. These are tough times and you are not alone in hear­ing such news. There are tax rules sur­round­ing re­dun­dancy pay­ments that are sub­ject to con­di­tions and de­pend on the re­dun­dancy pack­age in ques­tion.

It is com­mon for peo­ple to re­ceive a lump sum that in­cludes the statu­tory lump sum for re­dun­dancy, which is what you are en­ti­tled to un­der em­ploy­ment leg­is­la­tion, po­ten­tially plus a fur­ther lump sum ne­go­ti­ated by the in­di­vid­ual with the com­pany and/or pay­ment in lieu of no­tice. The fol­low­ing is a sum­mary of the ba­sic tax rules and rates re­lat­ing to re­dun­dancy lump sum pay­ments. Pay­ments thatarenot­taxed The statu­tory re­dun­dancy lump sum is tax-free – if you re­ceive re­dun­dancy pay­ments in ad­di­tion to the statu­tory pay­ment there are ad­di­tional tax re­lief’s avail­able (see be­low). Pay­mentsthat­don’tqual­i­fy­for­t­axre­lief If a lump sum is re­ceived on ter­mi­na­tion of a con­tract, and was pro­vided for within the con­tract of em­ploy­ment, then full in­come tax rules ap­ply as nor­mal. Tax reliefs There are tax reliefs that re­duce the tax­able por­tion of the lump sum re­ceived. There are three types of tax re­lief avail­able. On re­ceiptof a first re­dun­dancy pay­ment, em­ploy­ees are en­ti­tled to the high­est of the fol­low­ing:

Ba­sic ex­emp­tion - You are en­ti­tled to re­ceive tax free €10,160 plus €765 for each com­plete year of ser­vice (in ad­di­tion to the statu­tory en­ti­tle­ment). Part-time em­ploy­ees are treated as full time for the pur­pose of cal­cu­lat­ing the pe­riod of ser­vice and ca­reer breaks are ex­cluded.

In­creased ex­emp­tion - There is an ad­di­tional €10,000 avail­able tax free if you are not part of an oc­cu­pa­tional pen­sion, if you have given up the right to re­ceive a lump sum from a pen­sion and re­lief has not been claimed on a lump sum in the last 10 years. If you are in an oc­cu­pa­tional pen­sion scheme, the in­creased ex­emp­tion will be re­duced by any tax free lump sum you are en­ti­tled to from the pen­sion scheme. If the pen­sion re­lated pay­ment is greater than €10,000, no ex­tra re­lief is avail­able.

Stan­dard Cap­i­tal Su­per­an­nu­a­tion Ben­e­fit (SCSB) - This is an ad­di­tional re­lief for those with high earn­ings and long ser­vice and can be ap­plied if it gives an amount greater than ei­ther the in­creased ex­emp­tion. It is worked out us­ing a spe­cific for­mula – take the av­er­age earn­ings over the pre­vi­ous three years, mul­ti­ply by the num­ber of years’ ser­vice, di­vide by 15, and sub­tract any lump sum pen­sion pay­ment re­ceived or due. Re­stric­tions on ex­emp­tions The ba­sic ex­emp­tion and the SCSB can be given only once against a lump sum from the same em­ployer or associated em­ployer. Lim­its on­tax-freelump­sum Since the start of 2011, there is an over­all limit of €200,000 on the tax-free lump sum. Lump sums above that limit and up to €575,000 will be taxed at 20%, and above €575,000 at the tax­payer’s mar­ginal rate. Cal­cu­lat­ing thetax­due The amount of your re­dun­dancy pay­ment that is tax free de­pends on the above, and the bal­ance is sub­ject to tax. The pay­ment can be cal­cu­lated as part of your cur­rent year’s in­come, or at the av­er­age rate of tax you have paid for the pre­vi­ous three years. This lat­ter cal­cu­la­tion is known as Top Slic­ing Re­lief and is of use to those who pre­vi­ously paid a low rate of tax but are cur­rently pay­ing a higher rate. The amount of the lump sum that is sub­ject to tax is not sub­ject to PRSI, how­ever the Uni­ver­sal So­cial Charge may be ap­plied.

The Rev­enue has a guide to re­dun­dancy pay­ments on its web­site (www.rev­enue.ie), which in­cludes a form you can print out and use to work out how much of your re­dun­dancy pay­ment is ex­empt from tax (Ap­pen­dix 1). How topay Your em­ployer is re­spon­si­ble for de­duct­ing tax from your in­come and may ap­ply the ba­sic ex­emp­tion or be in­formed by the rev­enue of how much that is to be treated as tax free and the rate to ap­ply to the bal­ance. If this doesn’t hap­pen or the in­cor­rect rate is ap­plied, you should con­tact your re­gional rev­enue of­fice.

Jim Doyle ACMA QFA is a part­ner in RDA Ac­coun­tants of­fer­ing full ac­coun­tancy, busi­ness ad­vi­sory, tax ad­vi­sory and fi­nan­cial ser­vices.

RDA Ac­coun­tants | 5 Up­per Ge­orge Street, Wex­ford | Louisville House, Wa­ter­ford Road,

Kilkenny | 053 91 70507 | www.rda.ie

RDA Wealth Ltd trad­ing as RDA Ac­coun­tants is reg­u­lated by the Cen­tral Bank of Ire­land

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