Q: I have recently been notified that I am to be made redundant and that I will receive a redundancy payment. Is this payment taxable?

A redundancy payment can be split into two separate payments- a statutory redundancy payment and a non statutory redundancy payment

All employees who have worked for an employer for at least two years are entitled to a statutory redundancy payment. This payment is tax free for the employee. The amount of the payment is calculated as follows:

• Two weeks’ pay for every year of service; and

• One week’s further pay

The maximum weekly pay is capped at €600 per week.

Example – Joan worked for 10 years for company and was made redundant. Her pay was €800 per week. She would be entitled to a statutory redundancy payment of – (€600 * 2 * 10) + €600 = €12,600.

Non statutory redundancy payment

In addition to the statutory redundancy payment an employer may offer an additional ex gratia termination payment to the employee. Some of this payment may be taxable if the payment exceeds the individual’s threshold. There are three methods of calculating an individual’s threshold:

1. Basic exemption

2. Increased basic exemption

3. Standard Capital Superannuation Benefit

An individual can claim whichever of the above three formula’s gives the highest threshold. If the non statutory payment exceeds this threshold the excess is liable to tax.

The excess (if any) will likely be liable to income tax at 41% plus levies. Top slicing relief can be claimed if the individual’s average tax rate over the previous three years was less than the income tax rate on the excess. This relief can be claimed after the year the redundancy payment was received.

To see if you are due a refund under top slicing relief call into one of our offices.

TaxAssist Accountants Waterford offers tax and accountancy advice