Redundancy Payments

In recent times we have seen a large number of redundancy announcements across various sectors including an unprecedented level of global tech layoffs. There are various circumstances in which an employee can get compensation for loss of employment and in many cases HR professionals and impacted employees are trying to understand the appropriate tax treatment of such compensation.

Lump sum payments on a redundancy or retirement can be eligible for special tax treatment and may be partially or totally exempt from income tax, PRSI and USC.

Lump sum payments exempt from tax

Certain lump sum payments by an employer to an employee can be exempt from tax including the following:

• Statutory redundancy lump sums

• A payment made on account of death, injury or disability (subject to a maximum lifetime tax-free limit of €200,000)

• Certain payments to employees as a result of employment law rights claims

The following payments are not exempt from tax but may qualify for tax relief:

• An ex-gratia payment (being a non-statutory redundancy payment which is over and above the statutory redundancy payment)

• Payment in lieu of notice (note that if this lump sum is paid under the terms of a contract, it is taxable in full and does not qualify for exemption or relief)

Tax relief on redundancy or retirement payments

On a redundancy or retirement payment an employee may be entitled to the higher of:

• Basic Exemption - €10,160, plus €765 for each complete year of service

• Increased Exemption - an additional €10,000 on top of the Basic Exemption if the employee hasn't 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

• Standard Capital Superannuation Benefit (SCSB) - this is an additional relief an employee may be entitled to. It benefits employees with high earnings and long service. At a high level, SCSB is calculated as 1/15th of the average annual pay for the last 36 months in employment. This is multiplied by the number of full years of service. Any tax-free lump sums received are subtracted from this benefit.

The above may be of interest to any law firms who are advising their clients on redundancies; HR professionals who are dealing with employee redundancies and the necessary payroll obligations; or individual employees who are seeking personalised advice in respect of redundancy payments.

If you would like to discuss the above exemptions and reliefs in further detail or require any assistance in understanding how they impact you, your employees, or your clients, please do not hesitate to contact us.

This material is for informational purposes only and the availability of the above exemptions and reliefs will be dependent on the facts and circumstances of any individual case. This should not be construed as tax, financial, legal or any other advice and readers should take advice before applying the information contained herein.