Is My Redundancy Payment Subject to Tax?
When facing job loss the last thing you want to worry about is a large tax bill eating into your financial cushion. A common question we receive from clients reviewing their severance packages is exactly how much of their redundancy payment they will actually get to keep after Revenue takes its share.
The good news is that your statutory redundancy entitlement is completely tax free. This is the legal minimum payment based on your age and length of service. However if your employer offers an enhanced severance package or an ex gratia payment this additional money is generally subject to income tax. To soften the blow Revenue provides specific tax reliefs and the most common of these is known as the Basic Exemption.
Calculating the Basic Exemption
The Basic Exemption is the most straightforward tax relief available when you receive an enhanced redundancy package. Revenue allows you to receive a specific portion of your ex gratia payment without paying any tax on it.
The current Basic Exemption stands at €10,160. On top of this base figure you are also entitled to an additional tax free allowance of 765 euros for every complete year you have worked for your employer.
How the Exemption Works in Practice
To understand exactly what you get to keep you must look at your total years of continuous service. If you have worked for a company for ten complete years your exemption would be the base amount of 10,160 euros plus ten times 765 euros.
This calculation gives you a total tax free allowance of €17,810 for your ex gratia payment. Any amount you receive above this specific threshold will be subject to income tax and the Universal Social Charge at your normal rates. It is important to remember that your statutory redundancy is entirely separate and remains completely tax free regardless of these calculations.
Increased Exemptions Explained
If the basic calculation does not cover your entire severance package Revenue offers an Increased Exemption. This allows you to add a further €10,000 to your tax free allowance.
To qualify for this extra €10,000, you must meet two specific conditions. First you cannot have claimed a similar tax free lump sum in the previous ten years. Second, you must not be receiving a tax free lump sum from your employer pension scheme now or in the future.
If you are entitled to a pension lump sum that amount is deducted from the increase. For employees with long service and higher earnings another formula called the Standard Capital Superannuation Benefit might be more beneficial. We calculate all options to ensure you pay the absolute minimum tax required by law.
Getting the Best Severance Package
Trying to figure out the tax implications of job loss while going through it can be overwhelming. Before you agree to any final figures with your employer it’s important to have the numbers reviewed professionally. We can help make sure that your statutory rights are met and that your severance package is structured in the most tax efficient way possible under current Revenue guidelines.
If you are affected by redundancy and need advice on your severance package or your tax exemptions our employment law solicitors are here to assist. Contact our offices to arrange a consultation so we can review your agreement and protect your financial interests.
