How Lump Sums are Taxed - Part 1
Printed from www.survivingredundancy.ie Copyright © 2012
- Statutory Redundancy is exempt from tax. So if you are not getting anything more, then you don't need to read any further.
- 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
How much tax do I have to pay on my redundancy payment if I am NOT in an employer’s pension scheme?
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. It also has lots of examples and an appendix to allow you to calculate the tax free amount.
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 | €10,000 |
| Plus | € 765 for each year of complete service |
| Basic Exemption | €10,160 |
| Plus Increased Exemption | €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.
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.
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 if you have less than 15 years' service and higher if you have 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. (Note – it is not the last three tax years)
The formula for calculating the SCSB is: A X B / 15 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
Does it matter if I am married or single?
For calculating the SCSB, it does not matter if you are married or single. But married people may get a favourable treatment in calculating Top Slicing Relief.
The Income Levy will apply only to the taxable portion of your Redundancy Payment
What is 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 . 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.
Related article: How Lump Sums are Taxed - Part 2