Redundancy can be a challenging time, but understanding the tax treatment of redundancy payments can help you plan your finances better. In Ireland, redundancy payments are subject to specific tax rules, and some payments may even be exempt from tax. Here's what you need to know.
1. What is a Redundancy Payment?
A redundancy payment is a lump sum paid to an employee when their job is terminated due to redundancy. This can include:
Statutory redundancy payments: The minimum payment required by law.
Ex-gratia (additional) redundancy payments: Payments made by the employer over and above the statutory amount.
2. Tax Treatment of Redundancy Payments
Statutory Redundancy Payments
These are completely exempt from income tax, Universal Social Charge (USC), and PRSI.
The statutory redundancy amount is calculated as:
Two weeks’ pay per year of service, plus
One additional bonus week,
Subject to a maximum of €600 per week.
Ex-Gratia Redundancy Payments
Ex-gratia payments may be partially or fully exempt from tax, depending on the circumstances.
The following exemptions may apply:
Basic Exemption
€10,160, plus €765 for each complete year of service.
Increased Exemption
An additional €10,000 may be claimed if:
- You have not received a tax-free lump sum from a pension scheme, and
- You are not a member of an occupational pension scheme.
Standard Capital Superannuation Benefit (SCSB) This is a formula-based exemption that may apply if it provides a higher tax-free amount than the basic exemption. The formula is:
(Average annual salary over last 3 years) × (Years of service) ÷ 15 - (Tax-free lump sums already received)
Amounts Above the Exemptions
Any portion of the ex-gratia payment that exceeds the applicable exemptions is subject to income tax. However, it is not subject to USC or PRSI.
3. Lifetime Tax-Free Limit
There is a lifetime tax-free limit of €200,000 on ex-gratia redundancy payments.
This includes all tax-free redundancy payments received during your lifetime.
4. Payments Not Considered Redundancy
Certain payments are not treated as redundancy payments and are fully taxable, such as:
Pay in lieu of notice.
Holiday pay.
Bonuses or arrears of wages.
5. How to Calculate Your Redundancy Payment
To calculate your statutory redundancy payment:
Determine your gross weekly pay (up to a maximum of €600 per week).
Multiply by two weeks for each year of service.
Add one bonus week.
For ex-gratia payments, consult with a tax advisor to determine the applicable exemptions and tax liability.
6. Claiming Tax Refunds
If you believe you have overpaid tax on a redundancy payment, you can apply for a refund from Revenue. Ensure you have all relevant documentation, including:
Your P45 and P60.
Details of the redundancy payment.
Evidence of tax deducted.
Conclusion
Understanding the tax treatment of redundancy payments can help you make the most of your entitlements and avoid unnecessary tax liabilities. If you’re unsure about your specific situation, consult a tax professional for tailored advice.
Alan is a Chartered Accountant and Tax Adviser and the founder of CloudAccounts, a remote practice that provides support for business owners, PAYE workers and anyone who requires professional assistance with their tax and accounting matters.
Alan also offers consultations and corporate seminars, to offer businesses and their employees' simple practical advice in easy-to-understand presentations, allowing employees to feel valued, supported and make the most of the company benefits. If you require further information please contact CloudAccounts today.
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The information shared on this page is for general knowledge only and should not be considered official tax advice. For personalised guidance, please book a 1:1 consultation.
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