Exemption of Statutory Redundancy Payments

If you’re getting redundancy, part of it may be tax-free, this includes the following payments:

• The statutory redundancy lump sum

• Payment made on account of death, injury or disability, up to a maximum lifetime tax-free limit of €200,000

• Certain payments made by employers to employees arising from employment law rights claims

The following payments aren’t exempt from tax but may qualify for some tax relief – see ‘tax-free entitlements’ below:

• Non-statutory redundancy payments paid by your employer that exceed the statutory redundancy payment. This is known as an’ ex-gratia’ payment.

• Payment in lieu of notice (however, if your contract of employment provides for a payment of this kind on termination of the contract, these tax-free entitlements don’t apply and you pay tax and PRSI in the normal way.

Tax-Free Entitlements

On a redundancy or retirement payment, you’re entitled to one of the following tax exemption options, whichever is higher:

1.Basic exemption

The Basic Exemption is €10,160 plus €765 for each complete year of service. (Not including statutory redundancy which is tax-free.)

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

• 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

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

2. Basic Exemption plus Increased Exemption

An additional €10,000 called the Increased Exemption is also in certain circumstances:

• If you haven't received a tax-free lump sum in the past 10 years and won’t be getting a lump sum pension payment now or in the future

• If you’re 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

3. Standard Capital Superannuation Benefit (SCSB)

This is an additional relief that typically benefits higher earners and long service. It can be used if the following formula gives a larger amount greater than the Basic Exemption or Basic Exemption plus Increased Exemption:

The Formula for SCSB:

The SCSB takes the average annual earnings over the previous 3 years (or the whole period of service if less than 3 years) and multiplies this figure by the number of years of service, then divides this by 15 and subtracts the lump sum superannuation payment received or that may be receivable.

For example:

If you were made redundant in 2014 after 20 years of 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 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

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 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.

Calculation of tax

A certain amount of your redundancy payment is tax-free and the balance will be taxed. This is taxed as part of the current year's income.

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

How to apply

Your employer is obliged to deduct tax from all your income but they may take account of the basic exemption, that is €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 doesn’t happen or if you end up paying too much tax, you should contact your regional Revenue office to claim a refund.

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