So the worst has happened and you have been told you are being made redundant from your job that you have been in for some time.
Don’t worry it is completely normal to have lots of questions at this time, especially about how much tax you may be faced with on any sums of money you receive.
What is the minimum redundancy payment you will be entitled to?
An employer in Ireland will only legally have to pay the minimum statutory redundancy payment, although many may choose to pay more due to agreements with unions or based on passed customs.
Not everyone will qualify for the statutory redundancy payment, you will need at least 2 years (104 weeks) of service with the company before you will qualify.
If you are eligible then you will be entitled to 2 weeks’ pay per year of service plus an additional bonus week’s pay.
For the purposes of your calculation your weekly pay will be capped at €600.
For Example:
A person that was recently made redundant had 10 years of service with their employer and was earnings €40,000 per annum (€769 per week) at the time.
10 years of service entitles them to 21 weeks of pay (2 weeks x 10 + 1 bonus week) @ €600 per week which equals a minimum statutory payment of €12,600.
How are are redundancy payments taxed in Ireland?
Statutory payments:
If you are just receiving the base amount of redundancy payment which is the statutory amount then this will be completely tax-free.
Ex Gratia Payments / Lump Sums
Choose the higher of the following: (Basic+ Increased Exemption or SBSB)
Basic Exemption: €10,160, plus €765 for each complete year of service.
Career breaks cannot be counted towards the exemption.
Increased Exemption: if you haven’t received a redundancy payment in the past 10 years then you may be entitled to an increased exemption of €10,000.
This will also depend on whether you are also receiving a lump sum pension payment along with your redundancy now or in the future, which must be deducted from the €10k exemption.
Standard Capital Superannuation Benefit (SCSB): If you are someone with a very long service period or a high earner then you may benefit from the SCSB.
This is best explained with an example:
John (Annual salary €70k for prior 3 years) was made redundant after 22 years of service and received a total ex gratia lump sum of €115,000 of which €15,000 was related to his pension. John has not received such a lump sum previously in his career.
Basic Exemption €10,160 + (22 years x €765) = €26,990.
Increased Exemption: €Nil as the €15k pension lump sum was greater than €10k.
SCSB: (€70,000 x 22 years / 15) – €15,000 = €87,667
In this situation John will be exempt from paying tax on his ex gratia payment up to €87,667.
Limits to Exemptions
There is a lifetime exemption limit of €200,000 on ex-gratia payments.
The total maximum exemption someone can receive on a redundancy payment is €200,000 even if the combined basic, increased or SCSB exemption total is more than €200,000.
What tax rates are charge on redundancy amounts not covered by exemptions?
The level of tax you will pay on redundancy payments not covered by an exemption will depend on your total income in that year collectively which will be collectively assessed.
| Tax Type | Applicable or not for |
|---|---|
| PAYE | Charged @ 20 / 40% |
| PRSI | Not applicable |
| USC | 0.5% / 2% / 4.5% / 8% |
Redundancy payments will not be subject to PRSI but will attract PAYE and USC.
This means the maximum tax rate you could possibly redundancy amount not covered by any exemption is 48% (For people earning over €70,017).
Is there a way to minimise any tax due on redundancy payments?
Make sure you calculate all possible exemptions. People often make the mistake of only calculating the basic and increased exemption limits and completely ignoring the Standard Capital Superannuation Benefit (SCSB).
But in reality, this may result in you receiving a much higher exemption on your ex-gratia payment.
What if my employer can’t afford to pay my redundancy entitlement?
There may be certain situations where the employer suddenly becomes insolvent and is unable to pay the statutory redundancy payments to its employees.
Even if the employer cannot pay, you can apply to get the payment from the Government under the Social Insurance Fund.
It it a completely different situation if the employer can afford to pay the redundancy but is refusing to do so. In these situations you should contact the Workplace Relations Commission.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.