Facing redundancy can be a difficult and uncertain time. Understanding how redundancy payments are taxed and what reliefs are available can make a significant difference to your financial outcome.

This Article outlines the type of payments that you may receive when you are made redundant by your employer and reliefs that may apply.

Typically redundancy payments fall into two categories:

• Statutory redundancy – the minimum legal payment an employer must make
• Additional (ex-gratia) payments – any additional amounts paid by the employer

Statutory Redundancy Payment

Where you lose your job because your employer is reducing staff numbers or closing the business, this is known as a redundancy.

Statutory redundancy payments are completely exempt from tax. This means no Income Tax, USC, or PRSI is payable. This is the guaranteed payment for employees with at least two years’ service.

If you are eligible for redundancy pay, you are entitled to:

• Two weeks pay for every year of service with a maximum of €600 a week.
• One additional week’s pay

Additional (ex-gratia) payments

Your employers may pay a voluntary non contractual ex-gratia termination payment in addition to the statutory redundancy payment.

While these payments are generally taxable, there are valuable tax reliefs and exemptions available that can significantly reduce the tax payable.

The three types of reliefs are (1) Basic Exemption, (2) Increaesed Basic Exemption and (3) Standard Capital Superannuation Benefit (SCSB) relief. You can usually claim the most beneficial option.

Pitfalls to be aware of

• A lifetime cap of €200,000 applies to tax-free ex-gratia payments.
• You can only use one exemption at a time (whichever is the highest).
• Certain payments (such as contractual notice period) may be fully taxable.
• Consideration of your occupational pension scheme  when calculating the Increased Exemption and SCSB relief.

Why Professional Advice Matters

Already a difficult time for an employee who has just been made redundant, you also have to consider the tax treatment of these payments .

The tax treatment of redundancy packages can vary significantly depending on:

• Length of service
• Salary level
• Pension entitlements
• Structure of the payment

Choosing the right relief can greatly reduce the overall tax payable on your termination payment.

Conclusion

It is extremely important that an employee gets professional tax advice before signing the Severance Agreement to ensure that the agreement is drafted in the most tax efficient manner. Once the Agreement is signed, it is generally too late to make any changes.

The obligation to deduct PAYE lies with the employer so it is important the employee obtains their own independent tax advice and the tax treatment of the payment is agreed with the employer. It is normal for a Severance Agreement to include a Tax Indemnity clause  where the employee agrees to indemnify in full against any tax liabilities or claims made by Revenue arising from or in connection with the payment of the Termination Payment.