Compensation for Loss of Employment - Taxation of Lump Sum


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Introduction

There are various circumstances in which people receive compensation for loss of employment. The most common is where you are made redundant and you get a settlement, which may include the statutory redundancy lump sum, and a further sum negotiated by you or your trade union with the employer. When you retire you may be paid a lump sum by your employer. If you had a fixed-term contract and it is ended early, you may get a lump sum in compensation. This document is about the taxation of your redundancy or retirement lump sum. It is not about the tax treatment of your pension scheme lump sum.

If all of your lump sum is statutory redundancy, or if it is a payment made on account of injury or disability, (subject to a maximum lifetime tax-free limit of €200,000), no tax is payable and therefore the rest of this document does not apply to you.

If you receive a lump sum in compensation for the loss of employment, part of it may be tax free. The following payments are tax free:

The following payments are not exempt from tax but may qualify for some tax relief – see ‘Tax-free entitlements’ below.

  • A non-statutory redundancy payment, that is, the amount paid by your employer, which is over and above the statutory redundancy payment. This is also known as an ex-gratia payment.
  • Payment in lieu of notice (However, if your contract of employment provides for a payment of this kind on termination of the contract, you pay tax and PRSI in the normal way.)

Tax-free entitlements

On a redundancy or retirement payment, you are entitled to one of the following tax exemption options, whichever is the higher.

Basic Exemption

The Basic Exemption due is €10,160, plus €765 for each complete year of service. (This does not include statutory redundancy which is tax free.)

Basic Exemption plus Increased Exemption

An additional €10,000 called the Increased Exemption is also available in the following certain circumstances:

  • If you haven't received a tax-free lump sum in the last 10 years and you are not getting a lump sum pension payment now or in the future

If you are in an occupational pension scheme, the Increased Exemption is reduced by any tax-free lump sum from the pension scheme you may be entitled to receive.

Standard Capital Superannuation Benefit (SCSB)

This is an additional relief due that normally benefits people with higher earnings and long service. It can be used if the following formula gives an amount greater than either basic exemption or Basic Exemption plus Increased Exemption.

Formula for SCSB: Take the average annual earnings over the previous 3 years (or the whole period of service, if less than 3 years), multiply this figure by the number of years service; divide by 15 and subtract the lump sum superannuation payment received or that may be receivable.

Example: You were made redundant in 2014 after 20 years' service and received a lump sum of €100,000 which is your first lump sum. You also got a lump sum of €20,000 from your pension scheme. Your pay for the last 3 years before the date of leaving work was €180,000. The amount of the lump sum which is exempt from tax is the higher of the following 2 calculations:

  1. The Basic Exemption is:
    €10,160 + €15,300 ( €765 x 20 years) = €25,460
    There is no Increased Exemption as the pension scheme lump sum of €20,000 is greater than €10,000
  2. The Standard Capital Superannuation Benefit (SCSB) is:
    €180,000 ÷ 3 x 20 ÷ 15 - €20,000 = €60,000

The taxable amount of your lump sum is therefore €40,000 (€100,000 - €60,000). As the above example shows the SCSB tax relief of €60,000 is a higher amount of tax relief than the Basic and Increased Exemptions of €25,460.

Calculation of tax

A certain amount of your redundancy payment is tax free, as described above, and the balance will be taxed. This is taxed as part of the current year's income.

Previously there was a second method based on your average rate of tax for the previous 3 years. This was known as Top Slicing Relief which was not available on lump sums of €200,000 or more paid on or after 1 January 2013 and was abolished for all ex-gratia lump sum payments made on or after 1 January 2014.

The amount of your lump sum that is subject to tax is not subject to social insurance (PRSI), but the Universal Social Charge may be payable.

How to apply

Your employer is obliged to deduct tax from all your income. He/she may take account of the basic exemption, that is the €10,160 plus €765 for each year of service. Revenue may inform the employer about the correct amount to be treated as tax free and the rate of tax to be applied to the rest. If this does not happen or if it is incorrect and you have paid too much tax, you should contact your regional Revenue office to claim a refund - see 'Where to apply' below.

You must declare the fact that you have received such a lump sum on your annual return of income to Revenue.

There is more detailed information in Revenue's leaflet Lump Sum Payments on Redundancy/Retirement.

Where to apply

Contact your regional Revenue office.

Last modified:05/11/2014
 

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