Redundancy and tax relief

A forced redundancy is not an outcome that either party involved wants to see, employer or employee. For the employer in most cases, it’s a sign of business contraction, for the employee this spells a dramatic change in personal circumstances, redundancy payment or not. If deemed unavoidable, it is important for employees to ensure that they have availed of any tax exemptions related to their specific circumstances. With this in mind, it might be worth reviewing both the scenarios and the rules that apply to each type. Redundancy and tax relief when its needed most needs to be at the forefront when this reality sinks in.  

Statutory Redundancy

Contrary to the name, not all employees are eligible for the statutory redundancy payment and must instead have two years of continuous service with their current employer. The employee must be in PRSI Class A employment and have been made redundant but not dismissed.

The sum received is based on two weeks’ pay for every year of service plus a one-week bonus payment subject to a gross weekly limit of €600 per week. Importantly, statutory redundancy payments are Tax-free up to a €200,000 lifetime limit that takes into account all redundancy payments and tax-free lump pension payments from all employments.  

Ex-Gratia Payments

While not a legal requirement, some employers may pay an ex-gratia or ‘favour’ payment to their employees. This is not a defined sum and is at the employer’s discretion. Unlike statutory redundancy payments, Ex-Gratia payments are not tax-free but do qualify for certain reliefs.

Claiming your redundancy reliefs

Tax relief can be claimed under one of the following exemptions, whichever is the highest:

Basic Exemption

This is where up to €10,160 can be received as a lump sum with an additional €765 tax-free for each year of completed service.

Increased Exemption

A €10,000 increase on top of the basic exemption can be allowed if the employee has, in the previous ten years, not claimed an exemption greater than the basic exemption and the employee is not a member of an occupational pension scheme or, if a member of a scheme, the employee has irrevocably given up the right to receive a lump sum from such a scheme by signing a waiver form. A portion of this entitlement may still be claimable even if the Basic exemption option is chosen. It would however be the responsibility of the employee to contact the Revenue office to seek this refund.

Standard Capital Superannuation Benefit (SCSB)

This option is primarily for those with long service and high earnings and enables them to receive a higher tax-free sum. This calculation is based on average annual earnings over the past three working years and multiplying this by the number of years services, then dividing this answer by 15 and deducting any Tax-free lump sum already paid or the discounted value of any future tax free lump sum due from a pension scheme.

While not to be interpreted as a legal entitlement to a statutory amount, the Dept of Employment Affairs and Social Protection have a Redundancy calculator redundancy calculator (click here) that might be useful.

Deciding on which option best suits you and why is where we can help. Redundancy and tax relief need not be a further ordeal. Just make an appointment through our online booking facility to explore the options open to you.