Paschal Donohoe (Dublin Central, Fine Gael)
Link to this: Individually | In context

Section 203 of the Taxes Consolidation Act 1997 (TCA 1997) exempts from income tax statutory redundancy payments.

Lump sum payments which arise as part of a redundancy package come within the charge to income tax by virtue of section 123 TCA 1997. There are, however, significant reliefs available on the potential tax liability arising from such payments contained in section 201 and Schedule 3 of TCA 1997.

Section 201 TCA 1997 contains the provisions for an exemption or relief from taxation for payments on retirement, redundancy or termination. The basic exemption, increased exemption and the Standard Capital Superannuation Benefit (‘SCSB’) give relief from amounts which would otherwise be subject to taxation and are subject to a lifetime individual limit of €200,000.

Where a taxpayer receives an ex-gratia lump sum payment as part of a redundancy, a liability to tax arises on the amount of the payment that exceeds either the:

• Basic exemption and increased exemption, if due, or
• SCSB.

The Basic Exemption is €10,160 plus €765 for each complete year that a taxpayer worked for their employer. An ex-gratia termination payment will be tax free if it does not exceed the Basic Exemption.

A taxpayer may be entitled to an increase of €10,000 on the basic exemption if:

• they have not received an amount in excess of the basic exemption in the previous ten years, and,
• they are a not a member of an occupational pension scheme, or, if they are a member of an occupational pension scheme, but they revoke their entitlement to receive a tax-free lump sum from that scheme.

The SCSB is an additional relief taxpayers may be entitled to, provided for in Schedule 3 of TCA 1997. SCSB is computed at 1/15th of a taxpayer’s average annual pay for the last 36 months in employment. This is then multiplied by the number of complete years of service with the employer. Any tax-free lump sum payments received, or which the taxpayer is entitled to receive, from their work pension, are subtracted from this benefit.

As stated, the basic exemption, increased exemption and the SCSB give relief from amounts which would otherwise be subject to taxation and are subject to a lifetime limit of €200,000 and the individual may apply whichever of the three exemptions is most beneficial to them. This lifetime limit is only applicable to ex-gratia lump sum payments which arise as part of a redundancy package and if any individual receives an amount exceeding the €200,000, the balance would be subject to income tax.

The Revenue website sets out further information on the tax treatment of lump sum termination payments in the hands of the employee, and that information is accessible at:

www.revenue.ie/en/personal-tax-credits-reliefs-and-exemptions/lump-sum-payments/index.aspx

Finally, as you will appreciate, there are many requests for the introduction of new tax reliefs and the extension of existing ones. In considering these, it is important to be mindful of the public finances and the many demands on the Exchequer and to have regard to budgetary constraints and the equitable treatment of all taxpayers. Tax reliefs, no matter how worthwhile in themselves, reduce the tax base and make general reform of the tax system that much more difficult. Therefore, I have no plans to enhance the relief any further at this time.