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