Treatment of Termination Payments
Submitted by bdoieadmin on Tue, 2010-11-16 17:24
At BDO we recognise the decision made by employers to terminate employees is stressful in the current climate. The task at hand is striking the right balance of payments for both the business and the employee.
Statutory Redundancy
The statutory redundancy payment that an employee is legally entitled to under employment legislation is exempt from tax. In order for an employee to qualify for a statutory redundancy payment, the employee must be making PRSI contributions under the A class and have worked continuously for the employer for at least two years.
The amount of redundancy payment is determined by the employee’s length of continuous service and weekly earnings. The weekly earnings include gross weekly wages and benefits in kind. Currently the maximum weekly amount for a statutory redundancy payment is €600. If an employee is eligible for a redundancy payment, they are entitled to two weeks pay for each year of service and a bonus weeks pay.
The employer is entitled to a rebate claim in relation to statutory redundancy payments.
Non Statutory Redundancy Payments
The amount payable by an employer to an employee which is in excess of the statutory redundancy payment, although not exempt from tax, does qualify for tax relief. On a first redundancy payment, the higher of the following amounts will be exempt from income tax:
- Basic exemption
- Increased basic exemption
- Standard Capital Superannuation Benefit (SCSB).
The employer can give the basic exemption or SCSB without the prior approval from Revenue. However, if the employee is due an increased exemption, the employer or employee must apply to Revenue in advance of the payment date to get approval for the increased exemption.
In addition there is a further relief from income tax (top slicing relief) available in relation to lump sum payments but this is made by the employee after the end of the tax year.
Please be aware that health contributions are due on a taxable part of a lump sum but there is no PRSI liability thereon. In addition, please note that redundancy payments are also exempt from the Income levies.
The calculations of exemptions and reliefs can be complex and detailed.
BDO can help you structure any termination payments in an efficient manner helping to minimise the tax cost.
Talk to us, contact a member of our Tax team.