Dominic Hannigan (Meath East, Labour)
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Question 126: To ask the Minister for Finance the actions that will be taken to tax excess severance packages made to former employees of majority State owned banks; and if he will make a statement on the matter. [9173/11]

Michael Noonan (Limerick City, Fine Gael)
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The position is that a severance payment made under the terms of a person's employment contract or where the employer is otherwise contractually bound to make the payment, the payment is treated, for income tax purposes, as remuneration from the employment and the payment is fully chargeable to Income Tax and Universal Social Charge (USC) in the same way as any other remuneration or benefits from the employment. In addition, where a severance payment is made outside of the terms of a person's employment contract or is otherwise made on a non-contractual basis, the severance payment is subject to income tax under the rules of sections 123 and 201 of, and Schedule 3 to, the Taxes Consolidation Act 1997.

I should point out that in Budget 2011 these provisions were amended. Accordingly, the maximum amount is restricted to €200,000 in respect of severance payments that can be paid free of income tax and USC depending on a number of factors, including whether there were any previous severance payments made free of tax. Any amount above €200,000 is chargeable to income tax, but may qualify for a relief that reduces the rate of income tax to be charged to a rate equal to the average rate of income tax paid by the person for the 3 years preceding the tax year in which the severance payment is treated as income. The taxable portion of any severance payment is chargeable to USC at the appropriate rate without any similar relief.

It should be noted that these rules apply equally to all employees in receipt of severance payments.

While there are no special rules in the tax code dealing specifically with excess severance payments made to former employees of majority State owned banks, I would point out that the Finance Act 2011 introduced a special regime (which effectively imposes a combined tax, USC and PRSI charge of 90%) on excess bonuses paid to employees of financial institutions which have received financial investment from the State.