What is Redundancy?
Redundancy is where an employee’s position ceases to exist and the employee is not replaced.
An employee aged 16 years or over with 2 years (104 weeks’) continuous service with an employer is entitled to a statutory redundancy payment.
What is the Statutory Redundancy Payment?
The amount is related to an employees length of service and normal weekly remuneration Two weeks gross pay per year of service up to a ceiling of €600 per week plus one week’s
pay which is also subject to the ceiling of €600 or €31,200 per annum
- Any period over 52 consecutive weeks where the indivdual is off work due to an injury at work
- Any period over 26 weeks where an individual is off work due to an illness - Any period on strike
- Any period of lay off from work
Note 1: Remuneration is defined as gross salary (before employee’s contributions to an approved pension scheme), benefits-in-kind, less Revenue agreed flat rate expenses
Note 2: Some employers make redundancy agreements and/or payments above the statutory rate Note 3: Statutory redundancy payments are exempt from tax
What is the governing legislation?
Redundancy Payments Acts 1967 – 2007
Protection of Employment (Exceptional Collective Redundancies and Related Matters) Act 2007
What do you need to qualify?
Aged 16 or over
Have at least 104 weeks continuous service (2 years)
Are in employment which is insurable for all SW benefits (although does not apply if you are part time)
Have been made redundant as a result of a genuine loss of position/job
What Notice does an Employer have to give?
Notice in writing Form RP50
How do you calculate the Statutory Redundancy Lump Sum?
Two weeks pay for each year of continuous employment over the age of 16 years A bonus week
Note 4: All excess days are portioned out of 365 (interpolated) e.g. 5 years 200 days = 5.55 years Note 5: Reckonable service is service excluding ordinary sick leave over 26 weeks +
Note 6: Reckonable service is service excluding occupational injury over 52 weeks +
Example No.1
Joe started working for his current employer on 1 January, 2000 and made redundant on 31 December, 2011. He earned a salary of €45,000.
As he had 12 years of service, Joe was entitled to: (12 x 2 weeks) + ( 1 week) x €600
(24) + (1) x €600 €15,000 tax free
Note 7: The employer applied for an eployers rebate refund of 60% of this payment from the Dept. of Jobs, Enterprise and Innovation
Note 8: The employer rebate was reduced from 60% to 15% wef 1 January, 2012
What about Ex Gratia Payments?
An employer may pay an additional amount to employees over and above the statutory redundancy payment. These payments are taxable but a number of exemptions are available which can reduce the amount charged to tax.
What calculation(s) must I complete to identify the tax free amount?
Three calculations are prepared and the one which gives the highest result and/or the higher exemption is the one applied. These are known as the ‘Basic Exemption’, ‘Increased Exemption’ or Standard Capital Superannuation Benefit (SCSB) calculations.
(A) Basic Exemption
The Basic Exemption is currently €10,160 together with an additional €765 for each complete year of service.
Example No.2
An individual gets a lump sum of €17,000 when the employment is terminated after 10 years and 6 months service
The basic exemption due is calculated as follows: €10,160 + (€765 x 10)
€10,160 + €7,650 €17,810
(B) Increased Exemption
The basic exemption may be increased by €10,000 to a maximum of €20,160 plus €765 for each complete year of service provided:
The individual has not made a claim for the increased exemption amount in the previous ten years.
If the individual is in an Occupational Pension Scheme (OPS), the increased exemption of €10,000 is reduced by the amount of (i) any Tax Free Lump Sum (TFLS) from the OPS to which s/he may be entitled or (ii) the present day value of any TFLS) which may be paid from the OPS.
Note 10: If the lump sum from the pension scheme is more than €10,000, the increased exemption is not due. Note 11:If the lump sum from the pension scheme is less than the €10,000, the increased exemption of €10,000 will apply less the amount of the pension scheme entitlement.
Note 12:Revenue approval must be sought for the increased exemption.
Example No.3
An individual gets a lump sum of €20,000 after 11 years of service with the same employer. A lump sum of €11,000 is received from the pension scheme. What is the basic exemption?
€10,160 + (€765 x 11) €10,160 + €8,415 €18,575
Example No.4
An amount of €29,000 is aid to an individual when employment is terminated. They had reckonable service of 11 years and five months. The present day value of the pension scheme entitlement at 65 years is €2,500. What is the exemption due?
€10,160 + (€10,000 – €2,500) + (€765 X 11) €10,160 + €7,500 + €8,415
(C) SCSB
This relief generally applies to those individuals who have long service and high earnings. It is a relief given for each year of service equivalent to 1/15th of the average annual pay for the last three years (or 36 months) of service, to date of leaving less any TFLS entitlement from an OPS.
SCSB Formula = A x B / 15 – C, where:
A is the average annual remuneration for the last 36 months of service to date of termination of employment B is the number of complete years of service
C is the value of any TFLS received or receivable from an OPS.
Note 13: With effect from 1 January 2011, the maximum amount of TFLS which can be received from an approved OPS is €200,000. Therefore, C is restricted to €200,000 wef 2011. [Source: s8, FA 2011]
Note 14: If an individual signs a “waiver letter” confirming that they will not avail of any TFLS from the current OPS or at retirement, the value of any deferred TFLS will be nil, that is C (from above) will be nil.
Example No. 5
An employee opted for early retirement on 1 November, 2011 after completing 21 years of service and received a lump sum of €60,000. A TFLS of €25,000 was paid from the pension scheme. What is the tax free amount which can be paid based on the following:
Period Remuneration No. of Months
01/01/2011 – 31/10/2011 €41,667 10
01/01/2010 – 31/12/2010 €50,000 12
01/01/2009 – 31/12/2009 €45,000 12
01/11/2008 – 31/12/2008 €7,000 2
Totals €143,667 36
Average Ann Rem. €47,889
The highest of the following is the maximum amount that can be received tax free. (A) Basic Exemption: €10,160 + (€765 x 21) = €26,225
(B) Increased Exemption: Not applicable
(C) SCSB: €47,889 x 21 less €25,000 = €42,045 15
Example No. 6
An individual was made redundant after 18 years of service. The total remuneration for the final 36 months of employment was €95,000. A retirement lump sum of €60,000 was received on retirement in addition to a lump sum of €11,000 from an approved OPS.
The highest of the following is the maximum amount that can be received tax free. (A) Basic Exemption: €10,160 + (€765 x 18) = €23,930
(B) Increased Exemption: Not applicable
(C) SCSB: €31,666 x 18 less €11,000 = €27,000 15
Therefore, €27,000 is the maximum amount that can be paid tax free which means €33,000 is the amount subject to deductions of PAYE and USC.
Example No. 7
An individual was made redundant after 18 years of service. The total remuneration for the final 36 months of employment was €95,000. A retirement lump sum of €60,000 was received on retirement in addition to a lump sum of €7,000 from an approved OPS.
The highest of the following is the maximum amount that can be received tax free. (A) Basic Exemption: €10,160 + (€765 x 18) = €23,930 (B) Increased Exemption: €10,160 + (€10,000 - €7,000) + (€765 x 18) = €26,930
(C) SCSB: €31,666 x 18 less €7,000 = €31,000
15
Therefore, €31,000 is the maximum amount that can be paid tax free which means €29,000 is the amount subject to deductions of PAYE and USC (but not PRSI).
When does Top Slicing Relief apply?
The taxable lump sum payment is regarded as part of total income and is taxed accordingly but in certain circumstances, an additional relief called Top Slicing Relief may be due. This relief is available after the end of the tax year in which an ex-gratia lump sum was paid.
Top slicing relief ensures that a lump sum is not taxed at a rate higher than your average rate of tax for the three years prior to redundancy or retirement.
Top Slicing Relief Formula
Taxable lump sum X (tax rate applied to lump sum – average tax rate for previous three years).
Example No.8
An employee was made redundant. The taxable amount of the lump sum is €21,000 which is taxed at the marginal rate, that is, 41%; The average rate of tax for the prior three tax years was 34%. Top Slicing Relief: €21,000 X €41% - 34%) = €1,470
Therefore, the tax payable will be reduced by €1,470
Note 15: With effect from 1 January, 2005, the average rate of tax is calculated over the previous three years. Lump sum payments prior to this date are subject to an average rate of tax calculated over the previous five years.
What about foreign service?
A redundancy or retirement lump sum may be exempt or partially exempt where an individual has had foreign service with the employer who is paying the lump sum. A redundancy lump sum may be completely tax free provided:
75% or more of the entire period of employment, ending on the date of termination was foreign service, or
The period of service exceeded 10 years but the whole of the last 10 years was foreign service, or
One half of the period of service including any ten of the last 20 years was foreign service, provided the period of service exceeded 20 years.
If an individual does not qualify for full exemption, as reduced by any of the basic/increased/SCSB exemptions, then a further exemption may apply using the following formula:
Foreign Service Formula = P x FS/TS, where:
P is the gross lump sum payment (as reduced by basic/increased/SCSB) FS is the number of years of foreign service
TS is the number of years of total service
Example No. 9
An employee opted for early retirement on 31 December, 2011 after completing 15 years of service in Ireland and 6 years in the USA with the same employer. A lump sum of €60,000 was paid and a TFLS of €25,000 was paid from the pension scheme. The averaged annual remuneration works out at €47,8899 (that is, €143,667/3).
(A) Basic Exemption: €10,160 + (€765 x 21) = €26,225 (B) Increased Exemption: Not applicable
(C) SCSB: €47,889 x 21 less €25,000 = €42,045 15
(D) Foreign Service Exemption: (€60,000 - €42,455) x 6 = €5,012 21
Therefore, €47,057 is the maximum amount that can be paid tax free which means €12,943 is the amount subject to deductions of PAYE and USC (but not PRSI).
Summary
Step 1Calculate the redundancy or retirement payment which qualifies for relief, that is, the portion exempt from tax (excluding statutory redundancy, normal pay, holiday pay, etc)
Non-statutory redundancy €_________
Pay in lieu of notice €_________
Value of any asset(s) e.g. car €_________
Total €_________ (A)
Step 2
Exemption due is the higher of the (1), (2) or (3):
1. Basic Exemption (€10,160 + €765 x No of full years) €_________ (Refer Page 3)
2. Increased Exemption* €_________
(Refer Page 4)
3. SCSB** €_________
(Refer Page 5)
Higher of the three is: €_________(B)
Taxable amount of lump sum is (A – B)*** €_________
NB: Is foreign service calc. applicable? €_________ (Refer Page 8)
*€10,000 less TFLS plus Basic Exemption **SCSB Formula = A x B / 15 – C, where:
A is the average annual remuneration for the last 36 months of service to date of termination of employment B is the number of complete years of service
C is the value of any TFLS received or receivable from an OPS.
