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Termination Payments in Employment Law- How are they taxed?

By June 27, 2023June 26th, 2024No Comments

Termination Payments in Employment Law- How are they taxed?

There are various situations which may arise where an employee may receive compensation/severance pay for loss of employment from his employer.

The most common type of situation arises where an employee is made redundant. In those circumstances, an employee is entitled to statutory redundancy lump sum in circumstances where he/she has been in employment for no less than 2 continuous years.

The redundancy will consist of a statutory redundancy lumpsum which is capped at €600 for each week worked and the redundancy amount totals 2 weeks for each full year worked. This payment is exempt from tax.

An employer may agree to give the employee an ex-gratia (i.e. not legally obligated) payment which is a non-statutory redundancy/termination payment and which is taxed.

The employer may also not wish the employee to remain in unemployment during their notice period but is obliged to pay the employee for the period of the notice to which the employee is contractually entitled.

There are a number of tax reliefs/breaks which are available in relation to such ex-gratia payments.

  1. There is a basic exemption of €10,160 together with a sum of €765 for each complete year of service.
  2. There is an enhanced exemption also available of an additional €10,000 over and above the basic exemption if the employee has not received a tax-free lump sum in the last 10 years and is not getting a lump sum pension payment now or in the future.
  3. If the employee is in an occupational pension scheme the enhanced exemption is reduced by any tax-free lump sum from the pension scheme which the employee may be entitled to receive.
  4. There is a further exemption which normally benefits employees with higher earnings and long services which is known as the Standard Capital Superannuation Benefit (SCSB0. The amount is worked out based on a formula which is calculated as follows:
    1. Take the average annual earnings of 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 payments received.

If you require any further information on how termination of employment works, please do not hesitate to contact Brendan Dillon or any of the other solicitors in the office on 012960666.