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. If you had a fixed-term contract and it is ended
early, you may get a lump sum in compensation. A lump sum that is payable as
part of your pension arrangements when you retire is not in the same
If you receive a lump sum in compensation for the loss of employment, part
of it may be tax free. The statutory redundancy lump sum is always tax
free. The lump sum that you receive in compensation for loss of
employment could include:
- The statutory redundancy lump sum, which is non-taxable
- Payment in lieu of notice. This qualifies for some tax relief, see 'Basic
Exemption' below, except in the case where a contract provides for the
payment of a lump sum at the end of the contract period.
- Other compensation negotiated with your employer or ordered by a court or
Budget 2014: From 1 January 2014 Top Slicing Relief will no
longer be available in respect of all ex-gratia lump sum payments.
The Department of Social Protection website has an online
Redundancy Calculator for use in calculating the amount of redundancy
payment that is due to an employee.
On a redundancy or retirement payment, you are entitled to the higher of the
following which is then exempt from tax:
The basic exemption due is €10,160, plus €765 for each
complete year of service. (This does not include statutory redundancy which is
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
This is an additional relief due that normally benefits those with high
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
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 2012 after 20 years
service and received a lump sum of €65,000 which is your first lump sum. You
also got a lump sum of €12,000 from your pension scheme. Your pay for the
last 3 years before the date of leaving work was €99,000. The amount of the
lump sum which is exempt from tax is the higher of the following 2
- 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 €12,000
is greater than €10,000
- The Standard Capital Superannuation Benefit (SCSB) is:
€99,000 ÷ 3 x 20 ÷ 15 - €12,000 = €32,000
The taxable amount of your lump sum is therefore €33,000 (€65,000 -
€32,000). As the above example shows the SCSB tax relief of €32,000 is a
higher amount of tax relief than the Basic and Increased Exemptions of
Calculation of tax
A certain amount of your redundancy payment will be tax free, as described
above, and the balance will be taxed. This can be taxed as part of the current
year's income or at your average rate of tax in the previous 3 years - see
‘Calculating your average rate of tax’ below. This second method is known
as Top Slicing Relief which is claimed at the end of the tax year – see
‘Calculating Top Slicing Relief’ below. It is most useful to people who
paid tax mainly at the low rate during those 3 years, but are now paying tax at
the top rate. Under the Finance
Act 2013 (pdf) Top Slicing Relief is not available on lump sums of
€200,000 or more that are paid on or after 1 January 2013. It was announced
in Budget 2014 that Top Slicing Relief will no longer be available in respect
of all ex-gratia lump sum payments from 1 January 2014.
Calculating your average rate of tax
First, find your average rate of tax for previous 3 years. Calculate your
total reckonable income and your total tax paid for the previous 3 years. Then
divide your total tax paid by your total reckonable income and multiply it by
100 to get your average tax rate for the previous 3 years.
Average tax rate is €36,000 ÷ €114,000 x 100 = 31.6%
Calculating Top Slicing Relief
If you were made redundant in 2012 and the taxable amount of your lump sum
was €33,000, it may be taxed at your highest tax rate of 41% depending on
your income for the year. If your average rate of tax for the previous 3 tax
years was, for example, 31.6% as in the example above, the Top Slicing Relief
is as follows:
Tax payable on €33,000 @ 41% = €13,530
Tax payable on €33,000 @ 31.6% = €10,428
Tax payable using Top Slicing Relief will be reduced by €3,102 (€13,530
Top Slicing Relief is claimed at the end of the tax year in which you
receive the lump sum. So, you will pay the €13,530 when you receive your lump
sum and claim the €3,102 back at the end of the tax year.
The current year method is likely to be of greatest advantage to people who
are made redundant early in the tax year and who do not have a high taxable
income for the rest of the year, for example, if your only income for the rest
of the tax year is Jobseeker's
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. The Revenue Commissioners 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 the Revenue Commissioners.
There is more detailed information in the Revenue Commissioner's leaflet Lump Sum
Payments on Redundancy/Retirement (pdf).