Termination payments for PAYE workers
WHERE persons lose their jobs due to redundancy they will be entitled to redundancy, which is two weeks’ pay for each year of service plus one week. The weekly level of pay is limited to €600 in the calculation. This payment is exempt from tax.
A lump sum entitlement from a pension scheme will also be tax-free. However, where arrangements are made to increase the lump sum and reduce the annual payments the amount of the lump sum exemption is now capped at €200,000. Excess is taxable.
‘Golden Handshakes’ are a common term in everyday use. It refers to a voluntary payment by an employer to get rid of staff that are no longer required but may be able to bring a claim for unfair dismissal or threaten strike action if not bought off.
Here the exemption is € 10,160 plus €765 for each complete year of service. This €10,160 can also be increased by €10,000 if there was no prior claim for the last 10 years and the employee is not in a Company Pension Scheme. The excess above the relevant exempt figure will be taxable and the employer, in making the payment, will operate PAYE on the excess.
Employees with very long service can often benefit better under a formula known as the Standard Capital Superannuation Benefit (SCSB). Here the average annual pay including BIK for the final 3 years of employment is dividend by 15 and multiplied by the number of complete years of service. The result is then reduced by the current actuarial value of a future lump sum from a company pension. The overall SCSB limit is now capped at €200,000.
Top Slicing Relief, which reduced the tax rate on the taxable portion of any lump sum to the average of the three prior years, is abolished from 1/1/2014. Finally, payments which arise due to the death or injury of an employee are exempt from tax up to €200,000 with the excess being liable at marginal rate of tax. Payments made as a result of a finding by the Employment Appeals Tribunal or the Courts will be subject to the normal exemptions described above and the excess is taxable.
In the unusual circumstances of where an employee typically an ex-senior executive may have a Court action for a personal wrong suffered e.g. a liable action, then Courts will be subject to the normal exemptions described above and the excess awards of compensation by a Court would be tax-free.
Revenue approval is no longer required by the employer in order to apply the exemptions for a lump sum to the departing employee. However, if employer gets the amount wrong and fails to operate tax correctly the liability to pay an undercharge of tax falls on the employer. This is because the payments are made via the PAYE system.
PRSI does not have to be operated on termination payments. The position with USC is different in that the taxable excess over the exemption is liable to USC.