Lump Sum Payments (Redundancy/Retirement) | McDOWELL & CO ACCOUNTANTS

July 8, 2011

Introduction
What lump sum payments on a redundancy or retirement are exempt from tax?
What lump sum payments qualify for some relief from tax?
What tax relief is available?
How will my employer tax my lump sum?
When is the lump sum taxed?
What rate of tax applies to the taxable lump sum?
What is Top Slicing Relief?
What relief is available for Foreign Service?
What if I take a refund of Superannuation contributions?
Are PRSI and Health Contributions payable?
What is the time limit for claiming tax reliefs?
Where do I submit my claim?
What happens if the lump sum is invested?
Am I entitled to Social Welfare Payment?
Appendix 1
Appendix 2
Further Information

Introduction

Generally speaking, all payments made by employers to employees and directors are regarded as “Pay” for tax purposes. Employers must operate PAYE on such payments unless they are exempt from tax or the Revenue Commissioners gives other instructions.

Lump sum payments on a redundancy or a retirement, however, qualify for special tax treatment – they may be exempt from tax or may qualify for some relief from tax. A lump sum paid under the terms of a contract of employment is taxable in full and does not qualify for exemption or relief.

Your redundancy or retirement lump sum is exempt from tax if:

It is a statutory redundancy payment (this is an individuals statutory entitlement under employment legislation)
It is a payment made on account of injury or disability
The employment consisted of foreign service and certain conditions are met – see separate paragraph further on for details.

This is not an exhaustive list. For more information, kindly contact your Regional Revenue Office, the number for which is available at the end of this leaflet.

If all of your lump sum is statutory redundancy or a payment made on account of injury/disability, your employer will pay it without deducting tax and therefore the rest of this leaflet is not relevant to your circumstances.

The following redundancy and retirement payments, although not exempt from tax, qualify for some relief from tax. These are:

Salary or wages in lieu of notice, on redundancy or retirement. However, where the contract of employment provides for a payment of this kind on the termination of the contract, whatever the circumstances, such payment is chargeable to income tax in the normal way without the benefit of the exemptions and reliefs mentioned later.
Non-statutory redundancy payment i.e. the amount payable by your employer, which is over and above the statutory redundancy payment. The non-statutory redundancy payment is also known as a golden handshake or an ex-gratia payment (e.g. a person receives a lump sum of €20,000, which includes statutory redundancy of €5,000. Of the €20,000, €15,000 is taken into account and the €5,000 is ignored for tax purposes).

If your employer gives you all or part of the lump sum in some other form e.g. car, house, holiday, etc. the equivalent cash value of the item received is taxable (see example).

First Claim

On your first redundancy or retirement payment, the higher of the following will be exempt from tax:

Basic Exemption
Increased Exemption
Standard Capital Superannuation Benefit (SCSB).

These terms are explained in the following paragraphs.

If you are married, your entitlement to exemption against a lump sum payment is calculated independently of your spouse. This applies whether you are taxed under joint assessment, separate assessment or assessment as a single person.

Basic Exemption:

The basic exemption is €10,160 plus €765 for each full year of service with the employer making the redundancy payment.

Service before and after a career break may be added together for the purposes of determining a full year of service. The periods where the person was on the career break would not be included. For persons who job-share, there is no apportionment to take account of the part-time nature of the employment – that is they are credited with years service as if they worked full-time. Where the terms of the severance specifies that the payment is in respect of employment in group companies and the employee worked for such companies within the State, then those years of service can be taken into account in calculating the number of years service for the purpose of the basic exemption.

If you are unclear about what service should be taken into account please contact your Regional Revenue office.
Example

Mary gets a lump sum of €17,000 when she leaves her employment after 10 years and 6 months service.

The basic exemption due to her is €17,810 i.e. [ €10,160 plus ( €765 x 10 ) ]. There is therefore no tax due on the lump sum of €17,000 as it is under €17,810, the basic exemption in Mary’s case.

If the basic exemption covers your non-statutory lump sum payment there is no tax due on the lump sum. Your employer will not deduct tax and therefore the rest of this leaflet is not relevant to your circumstances.

Increased Exemption:

If you are not a member of an occupational pension (Superannuation) scheme or if you irrevocably give up your right to receive a lump sum from the pension scheme, the basic exemption as outlined above can be increased by €10,000. The basic exemption of €10,160, plus €765 for each full year of service is therefore increased by a further €10,000. The increased exemption can only be claimed if you have not made any claims in respect of a lump sum received in the previous 10 tax years.

If you are in an occupational pension scheme, 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.

Chart
tax-free lump sum received from pension scheme and the increase in basic exemption due A B C
Tax-free lump sum received from pension scheme €10,500 €1,000 Nil
Increase in basic exemption due Nil €9,000 (€10,000 – €1,000) €10,000
Example

Rita gets a lump sum of €20,000 when she leaves her job after 11 years service. She gets €11,000 from the pension scheme. She is only entitled to the basic exemption of €18,575 i.e. €10,160 + (€765 x 11).
Example

Ray gets a lump sum of €29,000 when he leaves his job after 11 years and 5 months. The present day value of his pension scheme entitlement at 65 years is €2,500. The exemption due to him is €26,075 i.e. (€10,160 + €7,500) plus (€765 x 11).
Example

Jim gets a lump sum of €29,000 when he leaves his job of 12 years and 10 months. He is not a member of a pension scheme. The increased exemption due to him is €29,340. [(€10,160 + €10,000)+(€765 x 12)]. There is no tax due on his lump sum of €29,000 as it is under €29,340, the increased exemption due to Jim.

If you find your lump sum is exempt from tax because of the increased exemption please go to “What relief is available for Foreign Service?” as the following pages will not be relevant to your circumstances.

SCSB (Standard Capital Superannuation Benefit):

This relief generally benefits those with high earnings and long service. It is a relief given for each year of service equal to 1/15th of the average annual pay for the last 3 years of service (36 months) to date of leaving less any tax-free lump sum entitlement from the pension scheme.

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.

If an employee has less than 3 years paid service with an employer prior to the date of leaving, the pay of the last 36 months of paid service is taken into account in arriving at the average for one year.

* Remuneration includes gross salary (before employee’s contributions to an approved pension scheme), benefits-in-kind, less Revenue agreed flat rate expenses.
Example

Jane commenced employment with Company X on 6/6/1985 and left on 8/6/2003 (18 full years service).

She received a retirement lump sum of €60,000. This is her first lump sum.

She also received a lump sum of €11,000 from an approved pension scheme.

Her pay including Benefit-in-kind for the last 36 months to date of leaving is €95,000 (from 9/6/2000 to 8/6/2003).

The amount of the lump sum, which is exempt from tax, is the higher of the following:

The Basic exemption of €23,930 [ €10,160 plus ( €765 x 18 years ) ]

The Increased exemption of €10,000 is not due in this case as the pension scheme lump sum of €11,000 is greater than €10,000, or

SCSB of €27,000 [ (€95,000/3 x 18/15 ) – €11,000 ]

Jane will get relief of €27,000 against her lump sum as this is the most favourable. The taxable amount of her lump sum is therefore €33,000 (€60,000 – €27,000).
Example of a Redundancy Payment

John was made redundant on 6 June 2003. He worked for 18 years with company X.

His pay for the final 36 months of employment was €95,000.
Payments due Amount
Normal salary €800
Arrears of pay €300
Bonus €500
Holiday pay €200

These are taxable in full under PAYE and do not form part of the redundancy package.

Redundancy Package Amounts Due
Non-statutory redundancy €40,000
Statutory Redundancy €2,000
Pay in lieu of notice €765
Company car valued at €4,000
Tax-free lump sum from pension fund €7,000

Statutory redundancy is exempt from tax and is therefore ignored.

Calculation of exemption due: Amount
Non-statutory redundancy €40,000
Pay in lieu of notice €765
Company car €4,000
Total lump sum €44,765

Basic Exemption = €23,930 [€10,160 plus (€765 x 18)]

Increased Exemption = €26,930 [€10,160 + (€10,000 – €7,000) + (€765 x 18)]

SCSB = €31,000 ( 95,000/3 x 18/15 – 7,000 )

The highest exemption is the SCSB of 31,000 and this is given against the lump sum. The taxable lump sum is therefore 13,765 (€44,765 – €31,000 ).

Subsequent Claim

The basic exemption and the SCSB, are generally available against any subsequent lump sum payment. However, they can only be given once against a lump sum from the same employer or an associated employer.

With effect from 1 January 2002, the increased exemption of €10,000 may be availed of if an individual has not made any claims for relief in respect of a lump sum received in the previous 10 tax years.

A guide to help you to calculate the amount of your lump sum, which is exempt from tax, is attached to this leaflet at Appendix 1.

Note: If you were granted tax relief in the 5 years prior to redundancy or retirement against a lump sum paid under an approved restructuring scheme, the tax relief due against your lump sum on redundancy or retirement will be reduced by the amount of relief already granted – please contact your Revenue Regional Office for details.

Your employer is obliged to deduct PAYE on all of the lump sum less the basic exemption or SCSB, as previously outlined. Your employer can give the basic exemption or SCSB without prior approval from Revenue. However, if you are due any increased exemption, either you or your employer should apply to Revenue well in advance of the payment date for approval to give the increased exemption.

To apply for approval to receive the increased exemption, if due, you should complete the application form, at Appendix 2 attached to this leaflet, and send it to your local Revenue district.

If Revenue has not granted approval at the time of payment, tax must be deducted by your employer on all of the lump sum less the basic exemption or SCSB. You may apply at any time afterwards (subject to a 4 year time limit – please see note “What is the time limit for claiming tax reliefs?”), to your Revenue Regional Office for the benefit of the increased exemption. It is not necessary to wait until the end of the tax year. You should send in your Form P45 in addition to the attached application form (Appendix 2), when claiming the exemption. Form P45 is the form given to you by an employer when you leave employment.

The lump sum is taxable in the year you leave employment or in the year you retire.
What rate of tax applies to the taxable lump sum?

The taxable lump sum payment is regarded as part of your total income and is taxed accordingly. In certain circumstances an additional relief called Top Slicing Relief may be due.

The reliefs outlined in this leaflet exempt or reduce the amount of the lump sum to be taxed. Top Slicing relief relates to the tax payable and ensures that your lump sum is not taxed at a rate higher than your average rate of tax for the 3 years* prior to redundancy or retirement.

The formula for calculating this relief is:

Taxable lump sum X (tax rate applied to lump sum – average taxrate for previous 3 years)

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.
Example

Jane was made redundant on 8 June 2005. The taxable amount of her lump sum is €21,000, which is taxed at her marginal rate of 42%. Her average rate of tax for the prior 3 tax years was 40%.

Top slicing relief is:

€21,000 x (42% – 40%) = €420

The tax payable by Jane will be reduced by €420.

*With effect from 1st January 2005, the average rate of tax is calculated over the previous 3 years. Lump sum payments taxable prior to 1st January 2005 are subject to an average rate of tax calculated over the previous 5 years.

Your redundancy or retirement lump sum may be exempt or partially exempt from tax where you have been on foreign service with the employer who is paying the lump sum, provided certain conditions are met. If you need details please contact your Regional Revenue Office.

If you receive a refund of Superannuation (pension scheme) contributions, the pension fund will automatically deduct tax at the standard rate of tax (currently 20%) from the refund (prior to 5 December 2001 the rate was 25%). This will satisfy all your tax obligations on this income.

Health Contributions are due on the taxable part of the lump sum. There is no PRSI liability.

The time limit for claiming tax reliefs in respect of lump sum payments is 4 years from the end of the year in which the lump sum payment is treated as income. Prior to 1st January 2005 the time limit was 6 years.

Your claim should be sent to your Regional Revenue Office, the address of which is shown on your Tax Credit Certificate or on any correspondence received from Revenue. Remember to quote your PPS number on all correspondence with Revenue.

Income from the investment of a lump sum is taxable in the normal way and depends on the type of investment you have made and the type of income you receive. Income from the investment of a lump sum should be shown on your tax returns as appropriate.
Am I entitled to Social Welfare Payment?

In some cases Redundancy/Retirement payment may affect entitlement to some Social Welfare payments. For further details please contact Information Section, Department of Social Protection Tel. 01- 704 3000 or your Local Social Welfare Office.

Download the pdfAppendix 1 (PDF, 32KB) as pdf-file, which you can print and fill out.
Appendix 2

Download the pdfAppendix 2 (PDF, 291KB) as pdf-file, which you can print and fill out.
Further Information

This leaflet is for general information only. You can get further information by contacting your local Revenue office.

Revenue Commissioners

Revised August 2005

While every effort is made to ensure that the information given in this leaflet is accurate, it is not a legal document. Responsibility cannot be accepted for any liability incurred or loss suffered as a consequence of relying on any matter published herein.

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