Certain payments made to you on retirement or redundancy may attract beneficial tax treatment. Thalia O'Toole and Olive O'Donoghue of our People Services team explain the tax implications of these payments below.
These payments include:
The statutory redundancy payment element of a severance payment is exempt from tax. You are entitled to a statutory redundancy payment if you have been employed for at least two years after attaining the age of 16 and have paid Irish PRSI at a qualifying class.
Statutory redundancy lump sums are calculated as two weeks’ pay for each year of reckonable service between ages sixteen and sixty-six plus one week’s pay. Income over €31,200 per year (€600 per week) is disregarded in calculating statutory redundancy.
In general, pension schemes have a facility whereby you can opt on retirement (including early retirement) to take a tax-free lump sum payment and a reduced pension.
The tax-free lump sum is capped at €200,000. Amounts in excess of this tax-free limit are subject to tax.
Tax free lump sums from a pension scheme can have an adverse effect on the tax reliefs available on ex gratia payments from employers (see below).
Employees with less than two years’ service with an employer, he/she can take a refund of personal pension contributions when leaving the employment.
A refund of the employee’s personal pension scheme contributions is subject to tax at 20% on payment by the pension scheme trustees. No further tax is payable on the refund received.
Where an employee opts to take a refund of personal contributions, the benefit of the employer contribution is lost.
Lump sum payments by an employer to an employee on retirement or redundancy may be taxable. However, a number of tax reliefs and exemptions may be available to negate or reduce the tax arising on these payments.
The ex-gratia payment qualifying for tax relief is subject to a lifetime limit of €200,000 with all severance payments received over the life of a claimant taken into account for the purposes of this €200,000 limit.
For example, if you receive an ex-gratia payment of €200,000 which qualified for exemption in 2025, your lifetime limit of €200,000 is fully used and termination payments you received in the future will be exposed to tax.
The basic tax-free exemption is calculated as €10,160 plus €765 for each completed year of service.
Entitlement to the basic exemption may be impacted where an employee has previously received a termination payment from the same employer or an associated employer.
The increased exemption is equal to the basic exemption plus a further €10,000 less the current actuarial value of any tax-free amount received or receivable from the company pension scheme.
A refund of personal pension contributions will not reduce the exemption.
Entitlement to this relief may be impacted where an employee has received a previous termination payment from the same or an associated employer or where the employee has claimed an exemption greater than the basic exemption in the last 10 years.
The Standard Capital Superannuation Benefit (SCSB) is calculated using the formula:
(A x B)/15 - C
where
A = 12 months average of the remuneration for the last 36 months
B = Number of completed years' service
C = Any tax-free lump sum received or receivable under the employer pension scheme.
This does not include refunds of personal pension contributions as described above.
The amount of the severance package in excess of the amount qualifying for tax exemption is taxable. Employee and employer PRSI is not payable on a severance payment.
However, the taxable portion of the termination payment is liable to income tax and the Universal Social Charge (USC) at the employee’s marginal tax rates.
| Example | € |
|---|---|
| Payment to individual | 65,000 |
| Less S.C.S.B. Exemption | (60,000) |
| Taxable Lump Sum | 5,000 |
| Income Tax (€5,000 at say 40%) | 2,000 |
| Universal Social Charge (€5,000 at say 8%) |
400 |
| Net payment | 2,600 |
This section provides a general overview of the benefits and contributions payable under the Social Welfare system. It is intended as a guide only, as personal circumstances differ, and the rules are subject to change.
The Department of Social Protection provides many publications on benefit entitlements and these are available at www.mywelfare.ie.
Individuals aged between 16 and 70 in employment or self-employment must pay social insurance contributions. PRSI is also payable by employees who are in receipt of additional unearned non-employment income i.e. rental income.
Once you reach 70 years of age, no further contributions are payable. Up to 31 December 2023, the upper age limit for PRSI exemption was 66. The increased in the age threshold of 70 years does not apply to individuals in receipt of the State Pension (Contributory) or individuals aged 66 on 1 January 2024 (born before 1 January 1958).
Employers are obliged to collect PRSI from workers' salaries and pay this over to Revenue as part of payroll tax obligations. Self-employed individuals must pay PRSI as part of their income tax liability each year.
The PRSI contributions you pay during your working life as an employee entitles you to State benefits such as Jobseeker’s Benefit, Illness Benefit and the State Pension (Contributory).
PRSI contribution classes
The main PRSI classes which qualify for Jobseeker related social welfare benefits are as follows:
Voluntary contributions
If you cease to be an employed contributor or self-employed contributor and have paid a minimum of 520 contributions, you may opt to pay voluntary contributions to maintain cover for pension purposes. Voluntary pension contributions do not provide cover for short term benefits such as Jobseeker’s Benefit, Illness Benefit or Maternity Benefit. Voluntary contribution applications must be made to the Department of Social Protection within 12 months of the end of the year in which a PRSI contribution was last paid or credited.
PRSI credits
PRSI credits are special contributions given automatically by the department if you are claiming Jobseeker’s Benefit/Allowance. These credits keep your social insurance record up-to-date to make voluntary contributions.
Taxation
Jobseeker’s Benefit is regarded as income for income tax purposes. However, the first €13.00 per week is ignored for tax purposes. Child dependent allowance when paid with Jobseeker’s Benefit is not taxable.
‘Signing on’
When an employment ceases, employer provide Revenue with details on the end of the employment as part of its detailed monthly payroll return. You should automatically receive a statement of your final payroll earnings directly from Revenue into your personalised Revenue ‘MyAccount’ inbox.
You should contact your local Social Welfare Office to apply for Jobseeker’s Benefit.
What happens if I go on holidays?
In general, you are disqualified from receiving Jobseeker’s Benefit while absent from the State. However, you may receive benefit for 2 weeks holidays in any calendar year. These holidays may be taken abroad. You should let the Department of Social Protection know that you are taking a holiday at least 2 weeks before you go away.
Illness while unemployed
If you become ill while unemployed you are no longer entitled to Jobseeker’s Benefit/Allowance, as you are not capable of work. During a period of illness Disability Benefit rather than Jobseeker’s Benefit may be payable.
Jobseeker's Benefit is generally paid for a maximum of 9 months, after which time you may apply for the means tested Jobseeker's Allowance payment. The means test considers any income that you or your spouse receive along with savings and investments, Each case is reviewed by the Department of Social Protection who issue a recommendation as to what level of assistance is to be paid.
The main items that count as means include:
People aged under 25 who do not have children get a reduced rate of Jobseeker's Allowance. If you take up a place on an education, training or work experience scheme, you will get a higher rate of payment.
The rate of Jobseekers Allowance payable to an individual can also be restricted where job offers or activation measures have been refused.
To qualify for Job Seekers benefit you must be available and actively seeking employment. Consequently, the carrying on during the normal working day of any trade, temporary employment, etc means that you are not available for work and not actively seeking employment. In these circumstances for each day this situation continues you will not be entitled to benefit.
However, if when you were employed you had part-time work, during the night or at weekends and continue this work whilst unemployed it should not affect your entitlement to benefit.
It should be noted that this would only be the case where the Social Welfare Office considered that such activities did not affect your ability to obtain employment or to make yourself available for employment during normal working hours.
If you attend a full-time educational course during normal working hours in order to acquire a new skill you will not be regarded as available for work and consequently not entitled to benefit. Certain government sponsored training courses are specifically excluded. Night courses would not affect your entitlements.
In addition, there are certain approved study options, which permit you to undertake further study and keep your benefit. As the Social Welfare Office looks at each case individually, you should seek a ruling from them regarding the position of any work/study before it is actually undertaken.
If you are in receipt of Jobseeker’s Benefit/Allowance, you may be entitled to extra benefits such as the Rent Supplement, Back to school clothing & footwear allowance and a medical card.
You must notify Department of Social Protection of any change in circumstances, which might affect your claim for benefit in particular if:
The State Pension (Contributory) becomes available to an individual from age 66. You have the option to defer claiming your pension until as late as age 70 if your 66th birthday is after the 1st January 2024. Deferring your State Pension (Contributory) can help you to Qualify for State Pension (Contributory) if you didn't qualify at age 66 or get a higher rate of State Pension (Contributory) than what you would have got at age 66.
If you previously worked and paid social insurance contributions in another EU country or a country with which Ireland has a bilateral social security agreement, you should apply 6 months before reaching pension age so that your claim can be decided in time. If known, you should supply details of your social insurance reference number in the other country.
How to qualify
You will qualify for State Pension (Contributory) if you are aged 66 or over and satisfy certain social insurance contribution conditions.
You can continue employment or self-employment after age 66 and also collect your State Pension (Contributory).
Class A
Class S
Navigating the complexities of severance payments and their tax implications can be challenging. Our team of experts at KPMG is here to help.
Contact Thalia O'Toole or Olive O'Donoghue of our People Services team today for personalised advice and ensure you’re making the best decisions for your financial future.
