Taxation of lump sum payments

Introduction

There are various circumstances in which you may get compensation for loss of employment.

The most common is where you are made redundant and you get the statutory redundancy lump sum. In some cases, you may get a further lump 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.

Lump sum payments qualify for special tax treatment - they may be exempt from tax or may qualify for some relief from tax.

This page is about the taxation of your redundancy or retirement lump sum. It is not about the tax treatment of your pension scheme lump sum.

What lump sum payments are exempt from tax?

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 statutory redundancy lump sum
  • A payment made on account of death, injury or disability, (subject to a maximum lifetime tax-free limit of €200,000)
  • Certain payments to employees as a result of employment law rights claims (pdf)

The following payments are not exempt from tax but may qualify for some tax relief:

  • An ex-gratia payment: this is a non-statutory redundancy paymentt paid by your employer, which is over and above the statutory redundancy payment
  • Payment in lieu of notice: however, if this lump sum is paid under the terms of your contract, it is taxable in full and does not qualify for exemption or relief

What tax relief is available?

On a redundancy or retirement payment, you are entitled to the higher of:

  • Basic Exemption
  • Increased Exemption
  • Increase for Standard Capital Superannuation Benefit (SCSB)

Basic Exemption

The Basic Exemption is €10,160, plus €765 for each complete year of service. (This does not include statutory redundancy which is tax free.)

The following can be counted towards a full year's service:

  • Time worked before and after a career break
  • A period of job-sharing or part-time work
  • For group companies, all work carried out in Ireland

If you have taken a career break the length of the break cannot be counted.

Increased Exemption

You can get an Increased Exemption of an additional €10,000 on top of the Basic Exemption if you:

  • Haven't received a tax-free lump sum in the last 10 years, and
  • Are not getting a lump sum pension payment now or in the future

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.

Standard Capital Superannuation Benefit (SCSB)

This SCSB is a tax relief that normally benefits people with higher earnings and long service. It can be used if the formula below gives an amount greater than either basic exemption or Basic Exemption plus Increased Exemption.

Formula for SCSB

  1. Take the average annual earnings over the previous 3 years (or the whole period of service, if less than 3 years)
  2. Multiply this figure by the number of years' service
  3. Divide by 15
  4. Subtract the lump sum pension payment received

Example

You were made redundant in 2020 after 20 years' service and received a lump sum of €100,000 which is your first lump sum.

You also received a lump sum of €20,000 from your approved 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:

  1. The Basic Exemption is:
    €10,160 + €15,300 ( €765 x 20 years) = €25,460
    There is no Increased Exemption as the pension scheme lump sum of €20,000 is greater than €10,000 limit
  2. The Standard Capital Superannuation Benefit (SCSB) is:
    €180,000 ÷ 3 x 20 ÷ 15 - €20,000 = €60,000

The taxable amount of your lump sum is €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.

You can get more examples of taxation of lump sums from Revenue (pdf).

What rate of tax applies?

A certain amount of your redundancy payment is tax free, as described above. The balance, known as the taxable lump sum payment, is treated as part of your total income and is taxed accordingly. This is taxed as part of your current year's income.

The amount of your lump sum that is subject to tax is not subject to social insurance (PRSI), but you may have to pay the Universal Social Charge.

How will my employer tax my lump sum?

Your employer must deduct tax from all your income. They may take account of the basic exemption, that is the €10,160 plus €765 for each year of service.

Revenue may tell your 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 can make a claim for an exemption through myEnquiries on Revenue’s myAccount service.

You must declare the fact that you have received such a lump sum on your annual return of income to Revenue.

More information

There is more detailed information on Revenue's website about Lump Sum Payments on Redundancy or Retirement.


Page edited: 5 April 2022