There are various circumstances in which people receive compensation for loss of employment. The most common is where you are made redundant and you get a settlement, which may include the statutory redundancy lump sum, and a further sum negotiated by you or your trade union with the employer. When you retire you may be paid a lump sum by your employer. If you had a fixed-term contract and it is ended early, you may get a lump sum in compensation. This document is about the taxation of your redundancy or retirement lump sum. It is not about the tax treatment of your pension scheme lump sum.
If all of your lump sum is statutory redundancy, or if it is a payment made on account of injury or disability, (subject to a maximum lifetime tax-free limit of €200,000), no tax is payable and therefore the rest of this document does not apply to you.
If you receive a lump sum in compensation for the loss of employment, part of it may be tax free. The following payments are tax free:
The following payments are not exempt from tax but may qualify for some tax relief – see ‘Tax-free entitlements’ below.
On a redundancy or retirement payment, you are entitled to one of the following tax exemption options, whichever is the higher.
The Basic Exemption due is €10,160, plus €765 for each complete year of service. (This does not include statutory redundancy which is tax free.)
An additional €10,000 called the Increased Exemption is also available in the following certain circumstances:
If you are in an occupational pension scheme, the Increased Exemption is reduced by any tax-free lump sum from the pension scheme you may be entitled to receive.
This is an additional relief due that normally benefits people with higher earnings and long service. It can be used if the following formula gives an amount greater than either basic exemption or Basic Exemption plus Increased Exemption.
Formula for SCSB: Take the average annual earnings over the previous 3 years (or the whole period of service, if less than 3 years), multiply this figure by the number of years service; divide by 15 and subtract the lump sum superannuation payment received or that may be receivable.
Example: You were made redundant in 2014 after 20 years' service and received a lump sum of €100,000 which is your first lump sum. You also got a lump sum of €20,000 from your pension scheme. Your pay for the last 3 years before the date of leaving work was €180,000. The amount of the lump sum which is exempt from tax is the higher of the following 2 calculations:
The taxable amount of your lump sum is therefore €40,000 (€100,000 - €60,000). As the above example shows the SCSB tax relief of €60,000 is a higher amount of tax relief than the Basic and Increased Exemptions of €25,460.
A certain amount of your redundancy payment is tax free, as described above, and the balance will be taxed. This is taxed as part of the current year's income.
Previously there was a second method based on your average rate of tax for the previous 3 years. This was known as Top Slicing Relief which was not available on lump sums of €200,000 or more paid on or after 1 January 2013 and was abolished for all ex-gratia lump sum payments made on or after 1 January 2014.
Your employer is obliged to deduct tax from all your income. He/she may take account of the basic exemption, that is the €10,160 plus €765 for each year of service. Revenue may inform the employer about the correct amount to be treated as tax free and the rate of tax to be applied to the rest. If this does not happen or if it is incorrect and you have paid too much tax, you should contact your regional Revenue office to claim a refund - see 'Where to apply' below.
You must declare the fact that you have received such a lump sum on your annual return of income to Revenue.
There is more detailed information in Revenue's leaflet Lump Sum Payments on Redundancy/Retirement.
Contact your regional Revenue office.
If you have a question relating to this topic you can contact the Citizens Information Phone Service on 0761 07 4000. The Phone Service will operate Monday to Friday, 9am to 6pm during January 2017. You can also visit your local Citizens Information Centre.