Someday you may leave your employment as a result of redundancy, either compulsory or voluntary.  In these circumstance, the employee may be provided with a termination lump sum payment by his or her employer.

Redundancy Options

Someday you may leave your employment as a result of redundancy, either compulsory or voluntary.  In these circumstance, the employee may be provided with a termination lump sum payment by his or her employer. 

Such a payment will comprise a statutory redundancy payment and possibly an additional ex-gratia termination payment.

Statutory Redundancy Payment

In general, the level of this payment which must be provided to an employee whose service has been terminated is:

Two weeks’ gross pay, including regular overtime and BIKs before taxes, for each year of service*

PLUS

One week’s gross pay Gross pay is subject to maximum ceiling of €600 pw

the excess of gross weekly pay above this level is not taken into account in calculating statutory redundancy payment.

*Service with the employer where you are aged over Age 16;

*Fractions of a year are taken into account. For example, 9 years and 91 days’ service is taken as 9 91/365 years, i.e. 9.2493 years’ service.

Statutory redundancy payments are tax-free and the payment is made normally by the employer; however, if the employer is insolvent and unable to make the payment, the individual can apply to the Department of Business, Enterprise and Innovation for direct payment of the statutory redundancy payment.

Ex-Gratia Payment

An ex-gratia termination lump sum payment by the employer on redundancy is a voluntary payment made by the employer over and above the statutory redundancy payment, including salary or wages paid in lieu of notice, and not a lump sum provided by the employer’s pension scheme or provided under the terms of employment.  An ex-gratia termination payment also includes the value of any non-cash benefits provided by the employer on termination of employment.

Payment of salary in lieu of notice is also treated as a termination payment. Part or all of the ex-gratia termination payment may be exempt from income tax in the hands of the employee. The exempt part of the ex-gratia payment is the higher of:

  1. Basic exemption;
  2. Increased exemption; and
  3. Standard capital superannuation benefit (SCSB).

Tax-free ex-gratia termination payments are subject to a maximum lifetime exemption limit of €200,000.

Therefore, the tax-exempt part of any ex-gratia payment calculated on the basis of the basic exemption, the increased exemption or the SSCB above, is subject to an overall lifetime exemption limit of €200,000 in respect of all tax-free ex-gratia termination payments received by the individual.  In applying this €200,000 limit, any prior tax-free ex-gratia termination payments received by an individual at any stage in the past must therefore be taken into account.

Note that statutory redundancy payments do not eat into an individual’s €200,000 limit on tax-free termination payments as the limit refers only to tax-free ex-gratia termination payments.  Where an individual has received tax-free ex-gratia termination payments in excess of €200,000, any further ex-gratia termination payments made to that individual will be fully taxable at marginal rate income tax, and none of the reliefs following would apply.

Universal Social Charge

The tax-free part of an ex-gratia termination payment is not subject to the USC, but the taxable part is liable to income tax and USC.

Professional Advice

We strongly recommend that you seek professional advice in this area should you be effected at some time in your working life.  Professional advice can provide reassurance about your financial situation and help guide you to taking the most appropriate decision when placed in front of you.

Calculating your exempt from tax portion of your Ex-Gratia payment

  1. Basic Exemption

The Basic exemption amount is €10,160 plus €765 for each complete year of service with the employer up to the date of termination of employment.

  1. Increased Exemption

The increased tax-free exemption amount is the basic exemption increased by up to €10,000 where:

  1. The individual has not previously made a claim for tax relief on a termination payment within the last 10 years; AND
  2. The individual has not received and is not entitled to receive any tax-free lump sum from an occupational pension scheme related to that employment. This condition could be met:
  1. Where the individual was not a member of an occupational pension scheme related to that employment; OR
  2. Where the individual is a member of an occupational pension scheme related to that employment but signs an irrevocable waiver to the scheme trustees giving up the right to take part of his or preserved retirement benefit in the scheme at retirement as a tax-free lump sum.

Where an individual retains a deferred tax-free lump sum entitlement at retirement under an occupational pension scheme related to that employment (for example, does not sign a waiver in respect of this right), the €10,000 increase is reduced by the present value of that tax-free lump sum entitlement.

  1. Standard Capital Superannuation Benefit (SCSB)

The SCSB may be a higher exemption figure again, particularly for employees with long service and/or high remuneration.

The SCSB is calculated as:

Key Factors in this calculation:

The term remuneration includes all benefits assessable to income tax under Schedule E, for example, would include BIKs related to that employment, but excludes any taxable termination payment.

The present value of the pension scheme tax-free lump sum refers, as before, to the present value of the employee’s tax-free lump sum entitlement under the employer’s occupational pension scheme using the traditional benefit option

If an individual is entitled to a pension tax-free lump sum now and is over Age 50, the value taken into account is the current tax-free sum which can be taken now.  If the entitlement to the tax-free lump sum is not immediate but is deferred, then the present or discounted value of the tax-free sum is taken into account.  Note that only tax-free pension lump sums have to be taken into account in the formula above; hence any part of a future pension lump sum liable to standard rate income tax (for example, over €200,000) is not taken into account in the formula to calculate the SCSB.

However, if the individual signs an irrevocable waiver to any lump sum benefit under the scheme, this value is set to zero in the calculation of the SCSB, so that the calculation of the SCSB then becomes:

Opting to Sign a Waiver to Lump Sum Entitlement?

Whether you sign a waiver or not can be a straight trade-off between getting more tax-free termination payment now, and getting no tax-free lump sum from the pension scheme later on, or vice versa.  Therefore, the options for an individual being made redundant and receiving a taxable ex-gratia termination payment, who has an entitlement to a preserved tax-free lump sum under their employer’s occupational pension scheme may be:

  1. To sign the waiver to give up a right to take a tax-free lump sum from the pension scheme in the future and in return get a higher tax-free termination payment now; OR
  2. Not sign the waiver and get a lower tax-free termination payment now, but retain the right to a tax-free lump sum at retirement from the pension scheme.

The key thing therefore is to compare the extra tax-free cash, if any, which can be obtained now by signing the waiver with the present value of the pension scheme tax-free lump sum given up by signing the waiver.