Understanding Redundancy Payments

Friday, March 14, 2014

Most people when they get their Redundancy Payment will be delighted and scared (it's a stressful time). And a lot confused. How did they get that figure? Why is tax being charged? Do I have to do anything?

Most people when they get their Redundancy Payment will be delighted and scared (it's a stressful time). And a lot confused. How did they get that figure? Why is tax being charged? Do I have to do anything?

 Let’s first break Redundancy Payments, also called Redundancy Lump Sums into smaller bite sized pieces being: 

  • Statutory redundancy amount
  • Revenue Exempt redundancy payments
  • Taxable amounts (including Top Slicing Relief)

Statutory Redundancy

In the event of Redundancy there are statutory minimum redundancy payments that the employer must pay to the employee. These minimum amounts are governed by the length of service and the gross weekly Pay of the employee as follows:

  • Two weeks Pay per year of employment (Length of Service)
  • One further week’s Pay
  • Subject to a maximum Pay of €600 per week

The gross weekly Pay is calculated as: your basic wage, before tax and deductions, inclusive of the average amount of any other benefits such as overtime received. The Length of Service excludes some absences such as extended sick leave and strike actions.

Revenue Exempt Payments

In addition to your Statutory Tax Free amount, you may also be due more of your redundancy tax-free through Revenue Exemptions. There are two possible methods to reduce the taxable amount of your redundancy payment and you are allowed whichever gives you the greater reduction in your taxable amount.

  • The Basic Exemption/Increased Exemption (BE/IE) method
  • The Standard Capital Superannuation Benefit (SCSB) method

BE/IE

The Basic Exemption (BE) is calculated as €10,160 + €760 for each full year of service with the employer.

The Increased Exemption (IE) increases the BE by €10,000 where the individual is not a member of an occupational pension scheme, where no previous claims of a reduction in tax-free payments have been received in the previous 10 years.

SCSB

This method calculates an exemption based on your recent earnings and number of years service.

It allows relief of 1/15th of your average annual pay over the last 3 years, times the number of full years service. This exemption amount is reduced by the amount of any tax-free lump sum received/receivable from the pension scheme.

Taxable Lump sum

If you have received a redundancy payment in excess of your Statutory payment and Revenue exempt amounts, this will be taxed by your employer just like a normal salary payment .

But as this could be a large amount and you will only have your normal monthly/weekly tax credits and tax bands, it is likely that most of this part of your redundancy payment will be charged at 41%.

Top Slicing Relief

This final calculation examines the amount of the tax charge and looks to reduce it further. This is called Top Slicing Relief. The key consideration in giving Top Slicing Relief is that the individual should not suffer a tax rate on their Lump Sum in excess of the average rate of tax paid on all their income for the previous 3 years.

i.e. if the lump sum is being taxed at the higher rate (41% in 2009) and the average tax rate applicable for the preceding 3 years was 35%, then a taxable lump sum of €16,800 would give :

Top-Slicing Relief of: €16,800 x (41%-35%) = €1,008.

Top Slicing Relief cannot be claimed until after the end of the tax year in which the redundancy payment was received. However, you will need to make sure that your previous 3 years taxes are correct before this can be reviewed - you can work on this straight away!

In practice, Top Slicing Relief can be large 5 figure sums. 

Red Oak Tax Refunds are Ireland’s premier PAYE Tax agency – specialising in Tax refunds for regular PAYE employees.

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