Taxing of Lump Sum Termination Payments

With recent news of redundancies in tech sector, below is an overview of the tax treatment applying to lump sum payments received on cessation of employment as certain payments may attract tax exemptions.

Statutory Redundancy Payments: Where you receive a statutory redundancy payment the amount received is ignored for taxation purposes as statutory redundancy is completely tax free.  You are entitled to a statutory redundancy payment if you have been employed by the company for at least two years after reaching the age of 16 and have paid Irish PRSI at a qualifying class.

The statutory redundancy lump sum is calculated as follows: 2 weeks’ pay for each year of reckonable service between ages 16 & 66 plus an additional 1 weeks’ pay, capped at €600 per week.

Ex-Gratia Termination Payments: Lump sum payments received from an employer via a redundancy program may be taxable. However, exemptions apply as follows:

1. Basic Exemption: The basic tax-free exemption is calculated as €10,160 plus €765 for each completed year of service. Entitlement to the basic exemption may be impacted where an employee has received a previous termination payment from the same or an associated employer.

2. Increased Exemption: The increased exemption is equal to the basic exemption plus a further €10,000 less the current actuarial value of any tax-free amount received or receivable from your company pension scheme. Therefore, if your entitlement to a pension scheme tax free lump sum exceeds €10,000, you will not avail of an increased exemption. Your ability to claim the increased exemption will be impacted if you have availed of the increased exemption within the last 10 years. A refund of personal pension contributions will not reduce the exemption.

3. Standard Capital Superannuation Benefit: The Standard Capital Superannuation Benefit (SCSB) is calculated using the formula:-

(A x B)/15 - C

where

A = 12 months average of the remuneration for the last 36 months

B = Number of completed years’ service

C = Any tax-free lump sum received or receivable under the employer pension scheme.

The amount of your termination payment which exceeds the above highest exemption is taxable.

 Some points on PRSI & USC: Employee and employer PRSI is not payable on a termination payment. However, the taxable portion of the termination payment is liable to income tax and the Universal Social Charge (USC) at your marginal tax rates.

Help from Eolas Money: Notification of redundancy can be a worrying time and the decision-making process can be overwhelming for some. Caution should be exercised if you are offered an increased SCSB exemption on the basis of waiving your future right to a tax-free lump sum from your pension scheme.. If you require any assistance with the calculations of your termination payments or would like to discuss any aspect of same, Eolas Money are happy to assist & advise you. You can contact us via queries@eolasmoney.ie

Booking a Consultation: If you wish to book a 30-minute consultation (€100+vat), you can select a suitable time in Jim’s diary by clicking HERE . An invoice from our stripe account will be issued post consultation.