The tax implications from redundancy
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.
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