How Lump Sums are Taxed - Part 2
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- Statutory Redundancy is exempt from tax. So if you are not getting anything more, then you don't need to read any further.
- This Chapter only applies to people in Occupational Pension Schemes – if you have a personal pension or a PRSA, this chapter does not apply to you.
How much tax do I have to pay on my redundancy payment if I am in an employer's pension scheme?
If you pay tax, make sure to claim Top Slicing Relief after the end of the tax year. It is up to you to claim and many people don't know about it. The Revenue Leaflet Lump Sum Payments IT 21 is excellent and easy to read and deals with issues beyond the scope of this summary such as foreign service and career breaks.
Summary
You do not have to pay any tax on statutory redundancy payments
If you get an additional, ex gratia, non-statutory payment from your employer, some of it will be exempt. The balance will be taxable as normal income.
1) you will get the following tax-free:
| Basic Exemption | €10,160 |
| Plus Increased Exemption if you qualify | €10,000 |
| Plus | €765 for each year of complete service |
So if you have worked for 10.5 years, you will get
€20,160 + €7,650 = €27,970 ( note €765 x 10, and not multiplied by 10.5)
If you get an ex-gratia payment of €37,970; €27,970 will be exempt, leaving you to pay normal income tax on the €10,000.
You will not qualify for the Increased Exemption in the following circumstances
If you have been made redundant in the last 10 years, and claimed relief in excess of the basic tax-free exemption (either the additional €10,000 or the SCSB), then you are not entitled to claim the additional €10,000 this time.
This increased exemption of €10,000 is reduced by the amount of:
- Any tax-free lump sum from the pension scheme to which you may be immediately entitled 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.
If the lump sum from the pension scheme is more than €10,000 you are not due the increased exemption. If it is less than €10,000 you are due the increased exemption of €10,000 less the amount of the pension scheme entitlement. You may irrevocable waive your right to a tax-free lump sum in the future, but this is not usually advisable. How is the present day value of any future lump sum calculated? Paul – I have no idea on this.
The Income Levy will apply only to the taxable portion of your Redundancy Payment
2) If you are a high earner, or if you have long service, you may get a higher exemption called the SCSB
If you have worked with your employer for 15 years, your exemption will be equal to one year's salary. The exemption will be lower for less than 15 years' service and higher for more than 15 years' service.
| Salary | 31,635 | 31,635 | 42,000 | 42,000 | 100,000 | 200,000 |
| Years' service | 2 | 15 | 2 | 10 | 30 | 2 |
| Normal exemption | 21690 | 31635 | 21690 | 27810 | 43110 | 21690 |
| SCSB | 4218 | 31635 | 5600 | 28000 | 200,000 | 26,667 |
The longer your service and the higher your salary, the more attractive the SCSB is to you.
Salary is actually the average salary over the past three years up to the date of the redundancy.
If you cannot claim the €10,000 increased exemption due to a previous claim for an increased exemption, the fact that you are in a pension scheme will not cause you to lose any further money. The increased exemption of €10,000 is reduced by the amount of:
- Any tax-free lump sum from the pension scheme to which you may be immediately entitled 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.
If the lump sum from the pension scheme is more than €10,000 you are not due the increased exemption. If it is less than €10,000 you are due the increased exemption of €10,000 less the amount of the pension scheme entitlement. The formula for calculating the SCSB is: A X B / 15 - C Where:
- A is the average annual remuneration* for the last 36 months service to date of termination
- B is the number of complete years of service
- C is the value of any tax free lump sum received/receivable under an approved pension scheme.
Top Slicing Relief?
You will normally pay tax on the taxable part of your lump sum at 41% - the top rate of tax. (Of course you could pay it at 20%) At the end of the tax year, you can claim Top Slicing Relief. This reduces the effective rate of tax from 41% to the average rate you paid in the previous 3 tax years. This is best illustrated by an example.
- Date of redundancy: 1 May 2009
- Taxable lump-sum: €10,000
- Top rate of tax in 2009: 41%
The average tax rate is the rate paid on all your income and not just on your income from this job per the P60.
| 2006 | 2007 | 2008 | Total | |
| Taxable income | 75,000 | 80,000 | 82,000 | 237,000 |
| Tax paid | 21,340 | 22,140 | 22,526 | 66,006 |
| Average rate | 27.8% |
Taxable income is income after allowable deductions e.g. for pension contributions.
It is important to add the income for the three years and the total tax paid for the three years to calculate the average. It is not correct to work out the average rate for each year and then divide that by three. Top Slicing Relief
| Tax paid on Lump Sum | €4,100 |
| Tax payable if taxed at 27.8% | €2,780 |
| Top Slicing Relief | €1,320 |
In the case of a couple, taxed under joint assessment, where both spouses have income in any of the three years preceding the tax year to which the termination payment refers, the tax rate will be based on the income of the spouse who received the termination payment or on the combined income of both spouses depending on which rate is the most beneficial to the couple. Top Slicing Relief may be claimed, by contacting Revenue after the end of the tax year.
Additional notes
Salary in lieu of notice is generally considered part of your redundancy pay However, where the contract of employment provides for a payment of this kind on the termination of the contract, such payment is chargeable to income tax in the normal way Strategic issues
The €10,000 is not affected by any lump sum receivable from a PRSA. So if redundancy is possible in the future, you should consider switching from an employer's scheme to a PRSA.
Each complete year of service is important, so if you are being made redundant just before your anniversary, then try to have the date changed so that you get an extra complete year.
If some of your lump-sum is going to be taxable at 41% , it may be better to be made redundant in a new tax year, so that you benefit from a full set of tax credits in case you don't work again during that year. This assumes that tax rates won't be higher in the new year.
Related article: How Lump Sums are Taxed - Part 1