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How are you taxed on your retrenchment package?

By Athenkosi Sawutana

Unemployment is one of the biggest problems in South Africa. The emergence of the Covid-19 pandemic has exacerbated the situation with a lot of companies retrenching their employees. When retrenched, you’ll receive a retrenchment package, but do you know how much tax you’re liable for?

JustMoney looks at how your retrenchment package is taxed.

Tip: Be able to pay your debt even when you get retrenched. Get a credit life cover quote here.

According to the law, when you get laid off at work you’re entitled to benefits such as a severance pay, leave, bonus, notice pay, and your pension or provident fund.

READ MORE: Retrenched – which payments are you entitled to?

Severance Pay

According to the South African Revenue Service (SARS), the amount of tax you pay on your severance depends on the pay-out you receive and the number of times you’ve been retrenched.

If your severance pay is less than R500,000, you’ll not pay any tax. However, if you’ve received this payment in the past you’ll be liable for tax – that is if it’s more than R500,000 when added together.

For instance, if you’ve been retrenched before and you received R250,000 as your severance pay and then you got retrenched again but received R270,000, you’ll be liable for tax according to laws set by SARS.

When calculating your tax, SARS takes into consideration any lump sums you’ve received including your retirement withdrawals. Below is the table of how much tax you’re liable for on your retirement benefits and severance pay. 

Taxable income (R)

​Rate of tax (R)

1 – 500,000​

​0% of taxable income​

​500,001 – 700,000​

​18% of taxable income above 500,000

700,001 – 1,050,000​

​​36,000 + 27% of taxable income above 700,000

​1,050,001 and above

​1,30,500 + 36% of taxable income above 1,050,000

*South African Revenue Service

If you’ve withdrawn money from your retirement fund, it will be added to your retrenchment benefits. That means the more benefits you receive the more tax you pay.

According to SARS, to qualify for the severance tax rate, your employment must have been terminated because the employer ended or is intending to end operations; or the employer embarks on a retrenchment exercise in order to reduce its head-count; or you’ve become incapacitated due to sickness, accident, or injury.

 You’ll also qualify for the tax incentive if you’ve attained the age of 55 years at the time you’re retrenched.

If you at any time held more than 5% of issued shares or a member’s interest in the company paying you the severance benefit, you’ll not qualify for the severance tax incentive.  

Leave pay, bonus, notice pay

As for leave pay, bonus, and notice pay, you’ll get taxed at normal personal income tax rates because these don’t form part of the severance pay. Your tax rate will depend on the amount you’ve received. Check the table below to see how much tax you’ll be liable for.

​Taxable income (R)

​Rates of tax (R)

1 – 205,900

18% of taxable income

205,901 – 32, 600

37,062 + 26% of taxable income above 205,900

321,601 – 445,100

67,144 + 31% of taxable income above 321,600

445,101 – 584,200

105,429 + 36% of taxable income above 445,100

584,201 – 744,800

155,505 + 39% of taxable income above 584,200

744,801 – 1,577,300

218,139 + 41% of taxable income above 744,800

1,577,301 and above

559,464 + 45% of taxable income above 1,577,300

*Source: South African Revenue Service

Pension and provident fund

When you get retrenched you can choose to withdraw your provident fund or put it in a preservation fund or transfer it to a retirement annuity. If you withdraw it, it will be taxed according to the retirement and severance table, meaning if your pay-out is less than R500,000, you’ll not pay tax. But if together with your severance pay it amounts to more than R500,000, you’ll pay tax.

How to declare the lump sum payment?

According to SARS, your employer must submit a tax directive application to SARS before the lump sum amount is paid to you. The employer must fill in an IRP3 form and send it to SARS where it will be calculated as to how much tax needs to be deducted. Your employer will then issue you with an IRP5 tax certificate that you can use when submitting your annual income tax return.  

We can help you continue saving for your retirement even after retrenchment. Fill in this form and a consultant will tell you how.

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