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Are Severance Payments taxed?

Are Severance Payments taxed?

Are Severance Payments taxed?

Section 1: Lump sum payments on cessation of employment

Certain payments made to you on retirement or redundancy may attract beneficial tax treatment.

These payments include the following:

  1. Statutory redundancy payments
  2. Pension lump sums
  3. Pension scheme refunds
  4. Ex gratia severance payments from an employer

1. Statutory redundancy payments

Where you receive a statutory redundancy payment the amount received is ignored for taxation purposes, i.e. statutory redundancy is completely tax free. You are entitled to a statutory redundancy payment if you have been employed by the company for at least two years after attaining the age of 16 and have paid Irish PRSI at a qualifying class.

The statutory redundancy lump sum is calculated as follows:

  • two weeks’ pay for each year of reckonable service between ages sixteen and sixty six and
  • an additional amount of one weeks pay.

Income over €31,200 per year (€600 per week) is disregarded in calculating statutory redundancy.

2. Pension scheme lump sums

In general, pension schemes have a facility whereby you can opt on retirement/early retirement to take a tax free lump sum and a reduced pension.

Under current legislation, the tax free lump sum is capped at €200,000. Amounts in excess of this tax free limit will be subject to tax.

3. Pension scheme refunds

In certain circumstances, i.e. where an employee has less than two years’ service with an employer, a refund of personal pension contributions can be claimed.

Refunds of personal pension scheme contributions are subject to tax at 20% on payment by the pension scheme trustees. No further tax is payable on the refund received.

It should be noted that where an employee opts to take a refund of personal contributions the benefit of the employer contribution is lost.

4. Ex gratia payments from employers

Lump sum payments received from an employer on retirement or redundancy may be taxable. However, there is a basic tax free exemption of €10,160 plus €765 for each completed year of service. The basic exemption may be increased by €10,000 in certain circumstances.

There is a further exemption known as the standard capital superannuation benefit (SCSB). These exemptions are dealt with in Section 2 - “Taxable Severance Payments”.

NOTE: Tax free payments received/receivable from a pension scheme as outlined in (2) above can have an adverse effect on the tax reliefs available against a lump sum received from an employer (See Section 2).

Section 2: Tax free severance payments

The current tax position as regards severance payments is summarised in the following paragraphs.

There are three exemptions and the highest exemption may be claimed subject to entitlement.

Under current legislation, the exempt amount under any of the following three reliefs is capped at €200,000. This €200,000 is a lifetime limit and all previous exempt severance payments received are taken into account in determining this €200,000 limit. For example, if you received an exempt payment of €300,000 in 1999, the €200,000 is fully used and any termination payment received is taxable.

1. Basic exemption

The basic tax free exemption is calculated as €10,160 plus €765 for each completed year of service.

Entitlement to the basic exemption may be impacted where an employee has received a previous termination payment from the same or an associated employer.

2. Increased exemption

The increased exemption is equal to the basic exemption plus a further €10,000 less the current actuarial value of any tax free amount received or receivable from the company pension scheme.

A refund of personal pension contributions (as described in Part 3 of Section 1 above) will not reduce the exemption.

Entitlement to this relief may be impacted as outlined above or where the employee has claimed an exemption greater than the basic exemption in the last 10 years.

3. Standard capital superannuation benefit

The Standard Capital Superannuation Benefit (SCSB) is calculated using the formula:-

(A x B)/15 - C

where

A = 12 months average of the remuneration for the last 36 months

B = Number of completed years service

C = Any tax free lump sum received or receivable under the employer pension scheme.

This does not include refunds of personal pension contributions as described in Part 3 of Section 1 above.

Section 3: Taxable severance payments

The amount of the severance payment in excess of the relevant exemption is taxable.

Employee and employer PRSI is not payable on a severance payment. However, the taxable portion of the termination payment is liable to income tax and the Universal Social Charge (USC) at the employee’s marginal tax rates.

Example
Payment to individual 65,000
Less S.C.S.B. Exemption (60,000)
Taxable Lump Sum 5,000
Income Tax (€5,000 at say 40%) 2,000
Universal Social Charge
(€5,000 at say 8%)
400
Net payment 2,600

 

The Universal Social Charge rates from 1 January 2019 are summarised in the table below.

Rate Annual Income Monthly Income
0.5% €0 to €12,012 €0 to €1,001
2.0% €12,013 to €19,874 €1,001 to €1,656
4.5% €19,875 to €70,044 €1,656 to €5,837
8% Over €70,044 Over €5,837

*Where total income for the year is less than €13,000 USC will not be due

Section 4: State social welfare benefits and contributions

This section provides a general overview of the benefits and contributions payable under the Social Welfare system. It is intended as a guide only, as personal circumstances differ. Please note that the rules are subject to change.

The Department of Social Protection produces many publications on benefit entitlements and these are available in hard copy or may be accessed through the department web site at www.welfare.ie.

Pay related social insurance (PRSI)

The PRSI contributions you have paid during your working life as an employee entitle you to a number of State benefits such as Jobseeker’s Benefit, Incapacity Benefit and the State Retirement/Old Age Pension.

When you leave employment, your PRSI record needs to be preserved to safeguard your entitlements. If you take up further employment your new employer will make the necessary deductions from your salary to facilitate continuity of your contributions record.

If you commence self-employment you must pay contributions with your income tax liability each year.

People aged between 16 and 66 who are in employment or self-employment must pay social insurance contributions. From 1 January 2014, PRSI is also payable by employees who are in receipt of additional unearned non-employment income.

Once you reach 66 years of age, no further contributions are payable.

PRSI contribution classes

The main PRSI classes which qualify for Jobseeker related social welfare benefits are as follows: -

Class A – This is the most common class covering individuals in employment. Contributions under this class provides cover for all social welfare benefits. (See list at end of section)

Class S – Covers the self-employed including certain company directors and people with investment income. Contributions under this class provides limited benefits. (See list at end of section)

Voluntary contributions

If you cease to be an employed contributor or self-employed contributor and have paid a minimum of 520 contributions you may opt to pay voluntary contributions to maintain cover for pension purposes. Voluntary pension contributions do not provide cover for short term benefits such as Jobseeker’s Benefit, Illness Benefit or Maternity Benefit.

Applications must be made within 12 months of the end of the PRSI Contribution year in which a PRSI contribution was last paid or credited. For further information contact the Department’s Voluntary Contribution Section at Tel. 1890 690 690.

PRSI credits

PRSI credits are special contributions given automatically by the department if you are claiming Jobseeker’s Benefit/Allowance. These credits keep your social insurance record up-to-date and avoid a need to make voluntary contributions.

Jobseeker’s Benefit

Taxation

Jobseeker’s Benefit is regarded as income for income tax purposes. However, the first €13.00 per week is ignored for tax purposes. Child dependent allowance when paid with Jobseeker’s Benefit is not taxable.

Flat rate Jobseeker’s Benefit

The maximum weekly rates payable from 25 March 2019 are as follows:

€203.00 for a single person
€337.70 for a married person supporting spouse
€34.00 per child under 12
€37.00 per child aged 12 and over

 

The following points should be noted: -

a) A married person is regarded as supporting a spouse if that spouse’s gross income is less than €100 per week. The adult dependent allowance is payable at a reduced rate where the dependent spouse is earning between €100 and €310 per week. If the spouse earns more than €310 per week, the increased rate for a married person supporting a spouse will not be payable. (They may also not be regarded as “dependent” if in receipt of certain Social Welfare/Health Board payments).

b) Jobseeker’s Benefit is payable for a period of

  • 9 months for individuals with 260 or more paid PRSI contributions
  • 6 months for individuals with less than 260 paid PRSI contributions

c) It should be noted that there is no payment for the first three days of unemployment.

d) The fact that you may have wealth in your own right has no effect on the payment of benefit for a period of 6/9 months. The benefit is not means tested apart from the dependent spouse allowance referred to in (a) above.

e) Only one increase is paid per qualifying child. However, both parents have an equal right to claim an increased benefit for their children. If both parents qualify, each will receive one half of the increased benefit referred to above.

f) To qualify for benefit you must have:

i. 104 weeks PRSI paid at a qualifying class since starting work,

And

ii. Either

  • 39 PRSI contributions in the second last contribution year prior to the benefit year of which at least 13 must have been paid PRSI contributions. For benefit claims in the calendar year 2019 you look at the contributions made in the calendar year 2017.

or

  • 26 paid PRSI contributions in both the second and third last contribution years prior to the benefit year. For benefit claims in the calendar year 2019 you look at the contributions made in the calendar years 2017 and 2016.

g) It should be noted that your entitlement to benefit could be affected if you are deemed by the Department of Social Protection not to be available for or actively seeking employment. This could arise if you have part-time employment during the course of a day or take up educational classes during the course of a day. Temporary work, while unemployed, is dealt with in more detail below.

h) You may be disqualified from payment for up to 9 weeks if you;

  • lose your job through your own misconduct,
  • leave your job of your own will and without good reason,
  • refuse an offer of suitable work,
  • refuse to do a FAS course without good reason,
  • are under 55 years, made redundant, and receive or are entitled to receive a cash settlement in excess of €50,000.

The 9 week period may be reduced at the discretion of the local Social Welfare Office. Usually, the schedule below is used in reducing the 9 week period of disqualification:

Amount of redundancy payment Period of disqualification
€50,000.01 - €55,000€50,000.01 - €55,000 1 Week
€55,000.01 - €60,000 2 Weeks
€60,000.01 - €65,000 3 Weeks
€65,000.01 - €70,000 4 Weeks
€70,000.01 - €75,000 5 Weeks
€75,000.01 - €80,000 6 Weeks
€80,000.01 - €85,000 7 Weeks
€85,000.01 - €90,000 8 Weeks
€90,000.01 and over 9 Weeks

 

‘Signing on’

From 1 January 2019, as a result of PAYE Real Time Reporting, an employer will no longer provide you with a Form P45 when you cease your employment. Instead, the employer will provide Revenue with details of the end of your employment as part of it’s detailed monthly payroll return. You should automatically receive a statement of your final payroll earnings directly from Revenue into your personalised Revenue ‘MyAccount’ inbox.

You should contact your local Social Welfare Office where you can apply for Jobseeker’s Benefit. The addresses of the various Social Welfare Offices are listed in the telephone directory or online on their website.

You will need to bring certain documents with you when making your first claim namely:

  • Passport or Driver’s license,
  • Household bill (e.g. ESB, Gas etc.), and
  • The statement of your final payroll earning received from Revenue into your “MyAccount” inbox.

What happens if I go on holidays?

In general you are disqualified from receiving Jobseeker’s Benefit while absent from the State. However, you may receive benefit for 2 weeks holidays in any calendar year. These holidays may be taken abroad.

The local Intreo centre or social welfare office should be advised 2 weeks in advance of departure using a form UP 30. It may be possible to notify your local Intreo centre or social welfare office online by completing a Jobseekers Online Holiday Application depending on the office. To apply online you must give 10 days notice but the application should not be made more than 21 days before departure.

Illness while unemployed

If you become ill while unemployed you are no longer entitled to Jobseeker’s Benefit/Allowance, as you are not capable of work. During a period of illness Disability Benefit rather than Jobseeker’s Benefit may be payable.

Jobseeker’s Allowance

If after 6/9 months you are still unemployed you may claim Jobseeker’s Allowance.

Jobseeker’s Allowance is means tested and the Social Welfare Office will take into account any income that you or your spouse receives. They will also look at any liquid capital assets such as deposit accounts, investments, etc. Each case is reviewed by the Department who issue a recommendation as to what level of assistance is to be paid.

The main items that count as means include:

  • Cash income which you or your spouse/partner have
  • The value of savings, investments, shares, land, etc.
  • Any property you may have (other than your own home, however if a room is rented in your home, that income is assessed)
  • Maintenance paid to you if you are separated
  • Benefit and privilege from living with your parents

If you are 24 years of age or under, reduced rates of Jobseekers Allowance apply on a graduated scale. However, those persons who are participating in approved training or have dependent children will continue to be entitled to full rates of payment.

If you are 24 years of age or under and are living with a parent or step-parent in the family home you may also be assessed on the benefit and privilege derived from your parent’s income.

When working out your means from savings or investments, the following items are added together and a special formula (see below) is used to work out your means:

  • Cash value of investment or property (other than your own home)
  • Money in a savings/current account
  • Cash-in-hand

Formula:

Capital Weekly Means Assessed
First €20,000 Nil
Next €10,000 €1 per €1,000
Next €10,000 €2 per €1,000
Excess of €40,000 €4 per €1,000

 

If you have a joint account with your spouse, civil partner or cohabitant, as the total amount in the account is legally owned by each of you, it can be assessed in full against each of you. However, if you are both in receipt of means-tested payments it will be assessed on a shared basis or against only one of you.

The full (Short term) rates for Jobseekers Allowance are as follows for a person aged 26 and over:

€203.00 for a single person
€337.70 for a married person supporting spouse
€34.00 per child under 12
€37.00 per child aged 12 and over

 

It should be noted that the above rates are the full amounts payable and may be reduced if you or your spouse are in receipt of any income or own assets/savings other than the family home.

The rate of Jobseekers Allowance payable to an individual can also be restricted where job offers or activation measures have been refused.

Part time work/study while unemployed

To qualify for benefit you must be available and actively seeking employment. Consequently the carrying on during the normal working day of any trade, temporary employment, etc. would in effect mean that you are not available for work and not actively seeking employment. In these circumstances for each day this situation continues you will not be entitled to benefit.

However, if when you were employed you had part-time work, during the night or at weekends and continue this work whilst unemployed it should not affect your entitlement to benefit. It should be noted that this would only be the case where the Social Welfare Office considered that such activities did not affect your ability to obtain employment or to make yourself available for employment during normal working hours.

If you attend a full time educational course during normal working hours in order to acquire a new skill you will not be regarded as available for work and consequently not entitled to benefit. Certain FAS training courses are specifically excluded. Night courses would not affect your entitlements. In addition, there are certain approved study options, which permit you to undertake further study and keep your benefit.

The above notes are a brief outline of the implications of work/study during a period of unemployment. As the Social Welfare Office looks at each case individually, you should seek a ruling from them regarding the position of any work/study before it is actually undertaken.

Extra Benefits

If you are in receipt of Jobseeker’s Benefit/Allowance, you may be entitled to:

  • Fuel allowance – weekly payment of €22.50 paid from October to help with heating costs. It may be payable with Jobseeker’s Allowance for 391 days. It is not payable with Jobseeker’s Benefit.
  • Back to school clothing & footwear allowance (BTSCFA) - this allowance is designed to help towards the cost of uniforms and footwear for children who are attending school. The scheme operates from the beginning of June to end of September each year - contact your local Health Board. From 2014, BTSCFA is no longer payable for those aged 18 or over who are in third-level education. It will continue to be paid for those aged between 18 and 22 who are in second-level education.
  • Medical card - if your income is below certain guidelines, you may qualify for a medical card. In 2019 the weekly income limits for medical cards for people aged over 70 is €500 for a single person and €900 for a couple - contact your local Health Board. The medical card will be replaced with a GP Visit Card for people over 70 with income between €500 and €770 for a single individual and between €900 and €1,540 for a couple.
  • School book scheme - each year the Department of Education and Skills provides grants to primary and second level schools towards the cost of schoolbooks for pupils in financial need. If you wish to apply you should contact your child/ren’s school Principal. Some schools operate a Book Loan Scheme. This means that books are provided for a nominal rental charge each year. You should contact your children’s school Principal if you require further information.

Change in circumstances

You must tell your Local Office of any change in circumstances, which might affect your claim for benefit in particular if:

  • You change address
  • You do any work (paid or unpaid), regardless of its duration
  • You are unable to seek work for any reason
  • There is any change in your or your spouse/partner’s income or financial circumstances. (This might affect your payment)
  • You are accepted on a FÁS training course, Community Employment Scheme or any other Government sponsored training/work programme
  • You claim or are getting any other benefit or payment
  • You start an educational course
  • You intend to leave the country (including holidays)
  • You intend to take up voluntary work
  • There’s any change in your family circumstances

State Pension

You can apply for a State Pension (Contributory) at age 66. You should apply 3 months before reaching age 66 for State Pension (Contributory). Under the new National Pensions Framework the retirement age for the State Pension will increase to age 67 in 2021 and age 68 in 2028.

If you previously worked and paid social insurance contributions in another EU country or a country with which Ireland has a Bilateral Social Security Agreement, you should apply 6 months before reaching pension age so that your claim can be decided in time. If known, you should supply details of your social insurance reference number in the other country.

How to qualify

You will qualify for State Pension (Contributory) if you:

  • Are aged 66 or over
  • Satisfy certain social insurance contribution conditions.

You can continue employment or self-employment after age 66 and also collect your State Pension (Contributory).

Benefit entitlements under each PRSI contribution class

Class A

  • Jobseeker’s Benefit
  • Invalidity pension
  • Maternity benefit
  • Adoptive Benefit
  • Carer’s Benefit
  • Illness Benefit
  • Widow’s/Widower’s Pension (Contributory)
  • Adoptive Benefit
  • State Pension (Contributory)
  • Treatment Benefit
  • Guardians Payment (Contributory)
  • Occupational Injuries Benefit
  • Health & Safety Benefit

Class S

  • Widow’s/Widower’s or Surviving Civil Partner’s Pension
  • Guardians Payment (Contributory)
  • Maternity Benefit
  • Adoptive Benefit
  • State Pension (Contributory).

Contact us

For further information, please contact Gemma Jacobsen via this form.

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