Non-Statutory Redundancy Payment
The amount payable by an employer, which is over and above the statutory redundancy payment, is known as a non-statutory redundancy payment (golden handshake or an ex-gratia payment). The non-statutory redundancy payment is taxable.
It is also important to bear in mind that if an employer gives an employee all or part of the lump sum in some other form e.g. holiday, a car, house, etc. the equivalent cash value of the item received is taxable.
There is a special tax treatment which may result in your non-statutory redundancy payment being exempt from tax. Irishtaxback.ie will be happy to assist you in reviewing and calculating your tax free entitlements.
Tax-Free Entitlements
Based on current Irish Legislation, when an employee receives a redundancy payment, which is over and above the statutory redundancy payment, they are entitled to the higher of the following, which is then exempt from tax.
Basic Exemption:
The basic exemption is €10,160 plus €765 for each full year of service.
Example – Basic Exemption
Mr. X receives a lump sum payment of €17,000 when he leaves his employment after 10 years of service.
Basic Exemption: €17,810 [€10,160 + (€765 x 10)]
There is no tax due on the lump sum payment of €17,000 as it is under his basic exemption.
Increased Exemption:
The increased exemption increases the basic exemption by €10,000.
Example – Increased Exemption 1
Mr. Y receives a lump sum payment of €35,000 when he leaves his employment after 20 years of service.
Basic Exemption: €25,460 [€10,160 + (€765 x 20)]
Increased Exemption: €35,460 [€25,460 + €10,000]
No tax is due on the lump sum of €35,000 as it is under €35,460.
If an employee is 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 the employee 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 the employee is not entitled to the increased exemption. If it is less than €10,000 the employee is due the increased exemption of €10,000 less the amount of the pension scheme entitlement.
Bear in mind that a PRSA is not an Occupational Pension Scheme, so does not affect your eligibility for increased exemption.
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.
Example – Increased Exemption 2
Mr. Y receives a lump sum payment of €30,000 when he leaves his employment after 20 years of service. Mr. Y is a member of an occupational pension scheme and is due to receive €5,000.
Basic Exemption: €25,460 [€10,160 + (€765 x 20)]
Increased Exemption: €30,460 [€25,460 + (€10,000 – €5,000)]
No tax is due on the lump sum of €30,000 as it is under €30,460.
Standard Capital Sperannuation Benefit – SCSB
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 the 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.
Example – Standard Capital Superannuation Benefit
Mr. Z commenced employment and has 18 full years service. Mr. Z received a redundancy lump sum of €60,000. He also received a lump sum of €11,000 from an approved pension scheme. His pay for the last 36 months to date of leaving is €95,000.
The amount of the lump sum, which is exempt from tax, is the higher of the following:
The Basic Exemption: €23,930 [€10,160 + (€765 x 18 years)]
The Increased Exemption: N/A – due to lump sum pension.
SCSB: €27,000 [(€95,000/3 x 18/15) – €11,000]
Mr. Z will be entitled to tax relief of €27,000 against his lump sum.
The taxable amount of his lump sum is therefore €33,000 [€60,000 – €27,000]
