Employment Termination

Termination Payments

There has been generous tax treatment for different types of payments made on termination of employment. Subject to certain conditions, sums up to one half times final salary may be taken on retirement, from an approved pension scheme. See our guides on pensions. There is a complete exemption from tax in relation to payments paid on the injury disability or death in service of an employee.

A payment made in connection with termination of employment is generally  taxable as an emolument, if it is a payment under or arising from the employment contract or is paid as consideration for services rendered by the employee under it.

As in the case of inducement or commencement payments, payments for the release or surrender of rights or ex-gratia payments would not be taxable in themselves under Schedule E principles as emoluments.  They’re not payments under the contract.

Where a person is put on so-called gardening leave, he or she effectively works out the period of notice but not attending at base of worker performing functions of employment. He or she is precluded from working for another. This is, of its nature, a payment under the contract and is taxable as such.

Tax & Reliefs

Notwithstanding that they may not be emoluments, termination payments are subject to taxation under separate provisions.  Formerly, more significant reliefs existed in respect of termination payment. They were reduced significantly during the financial crisis.

Section 123 of the Taxes Consolidation Act taxes certain payments in connection with termination of employment.  The payment must not be otherwise taxable.  It need not necessarily be pursuant to a legal obligation, so that ex-gratia payments made with no legal obligation, are taxable.

The payment may be in money or by a consideration other than money.  It may include a commutation of annual or periodic payments that would otherwise have been made, in connection with the termination of employment. The recipient may be the employee’s executor, spouse or a relative.

Payments may arise when the terms of employment are changed. Section 123 applies to such payments. Where there is a termination of employment  (and new re-employment on fundamentally different terms) the reliefs for termination may apply.

Under employment legislation an employee may be paid in lieu of notice upon dismissal. It is a question of interpretation as to whether it is payable under the contract and thereby a taxable emolument. In other cases, it  may fall within section 123 of the Taxes Consolidation Act, if it is a payment in connection with termination of the employment. It may be potentially exempt under the exceptions allowed in respect of that charge.

Neither employer nor employees PRSI apply to termination payments, regardless of whether they are subject to income tax.  Where income tax applies they may also be subject to USC.

Holiday pay is in the same category. It is generally treated as arising under the employment contract and thereby taxable.

Where loans are written off or assets are transferred (e.g. a company car) for no payment or at undervalue, they may be treated as part of the termination payments. There are accordingly subject to the same rules as for cash payments below.

Exemptions

Statutory redundancy payments are exempted from tax entirely. See the section on redundancy. The statutory minimum is two weeks’ pay per year of service to a maximum of €600 per week.

There are statutory exemptions from the charge on termination payments.  Excluded are:

• certain payments made in connection with the termination of an office or employment due to the death of the holder or made on account of injury, ill-health, terminal illness or disability of the holder. This was limited to €200,000 in 2013.
• certain payments made in connection with restrictive covenants;
• payments made under pension schemes where the contributions were assessed as emoluments on the employee;
• benefits under an approved pension scheme, statutory scheme, or scheme set up by a foreign government for the benefit of the employee;
• payments made in respect of foreign service where the period of foreign service made up three quarters of the total period of service, or where the period exceeded 10 years, the whole of the last 10 years or where it exceeded 20 years one-half of the period, including any 10 of the last 20 years.

Basic Relief

There are reliefs which are intended to mitigate tax liability and payments in connection with the termination of employment. They facilitate severance packages.

The maximum lifetime tax free relief is €200,000. Payments above this level are subject to income tax and USC which must be applied by the employer through PAYE.

The basic and standard exemption is of €10,160 plus €765 for each year of service.

Increased Exemption

The basic exemption may be increased by €10,000, provided there has been no  other such payment within the previous 10 years and no tax-free lump sum is paid or arises in the future under a pension scheme relating to the employment.  If less than €10,000 is received the €10,000 additional exemption is reduced accordingly. Where the benefit is due in the future the present value calculated on an actuarial basis of that amount is the reduction.

The increased exemption is   available by way of repayment of tax at the end of the tax year in which the employment terminated.   It is an alternative to standard capital superannuation benefit.

By concession the Revenue may allow the deduction to be taken immediately. Revenue prior approval is not required for the tax-free element but is required for the increased exemption.

Alternative

There is an alternative basis for exemption, which will be allowed if it produces a higher exempt amount. This is so-called standard capital superannuation benefit (SCSB). Employees are entitled to choose the basis that produces the largest exemption.

This is calculated as follows ((AxB)/15) – C

were

• A = average income employment income in the last 36 month including benefits in kind
• B = number of complete years of service with the employer
• C= the amount of any free lump sum from a pension scheme.

The effect is that after 15 years of service, a year’s income may be exempted, in addition to statutory redundancy.

Average employment income refers to taxable emoluments. If the period of employment has been less than three years, the average income is taken into account since commencement. The gross amount is included which may include certain sums which are excluded from the tax calculation. See below regarding the cap.

Various Issues

Where the employment has been with the employer and associated employers and or with group companies, the aggregate years of employment count. Certain foreign service is also included where was required under the employment contract.

There may be a break of employment (e.g. career break) provided there was employment before and after the break. The period of break itself is not counted as a year of employment. Part-time work is treated in the same way as full-time work.

Payments may be from a pension scheme or equivalent. If there is an entitlement to receive the payment the qualifying amount is reduced. It may be possible to waive the entitlement so that falls back into the pension fund.

Formerly, so-called top slicing relief was available. This reduced the rate of tax payable on the taxable part, to reflect the average rate of income tax actually paid in the previous years. Otherwise, the payment, being chargeable as income, is likely to be charged at the higher rate of tax. This relief was abolished in 2013.

Service Abroad

Where is an exemption for termination payments in respect of service outside the country, if certain conditions are met. Three quarters of the period of total service in the   last ten years, or if service exceeds ten years, half of the period including any ten of the last 20 years must be outside the country.

Where the above conditions are not satisfied, then a proportionate deduction is allowed, based on the number of years that the foreign service represents as a portion of the entire period of service.

Introduction of Cap

FA 2013 made changes to the level of tax relief available in respect of ex-gratia payments made by employers. Top Slicing Relief is no available from 1 January 2013 on ex-gratia lump sum payments where the non-statutory payment is €200,000 or over.

The maximum lifetime limit of €200,000 that may be paid tax free, in respect of termination or ex-gratia payments, is extended to cover ex-gratia payments made on account of the death or disability of an employee. Any amount exceeding €200,000 will be taxable in full and no other relieving provisions  apply to such amounts other than the retraining provision.

The first €5,000  of retraining costs made available as part of a redundancy package is tax exempt. The cost of retraining must be borne by the employer. It will generally be part of a redundancy package  to teach new skills or knowledge employment or setting up a business.

The course must be completed within six months of redundancy. The employee must have been employed for at least two years. The employee may not be connected with the employer. The sum is in addition to the cap of €200,000.

Restructuring

Where payment is made by reason of a change in terms and conditions of employment the above treatment may be available.

 The restructuring exemption only applies where the employer company is faced with a substantial adverse change in its competitive environment and restructures its operations, by agreement with its work force, to ensure its survival – and has been certified as such by the Minister for Enterprise, Trade and Employment (“the Minister) on the advice of the Labour Relations Commission (“the LRC”). The restructuring must involve pay reductions of at least 10 per cent of basic pay and must remain in place for at least 5 years.

The maximum tax-free lump sum per employee is as follows:  Reduction in pay Exemption Maximum tax-free lump sum

• At least 10% but not more than 15% €7,620 plus €255 for each year  of service up to a ceiling of  20 years’ service €12,720
• More than 15% but not more than 20% €7,620 plus €635 for each year  of service up to a ceiling of  20 years’ service €20,320
• More than 20% €10,160 plus €765 for each year of service up to a ceiling of  20 years’ service €25,460

Compensation for change in terms of employment

There is a separate relief from income tax in respect of certain lump sum payments which are chargeable to tax. The payments in question are those made to employees to compensate them for a reduction or possible reduction in future remuneration arising from a reorganisation of a business or change in work procedures, work methods or a change of place where the duties of the office or employment are performed. The relief is given by repayment of tax. The relief does not apply to a payment to which section 123 applies. Also, the relief is not available to proprietary directors or employees or to part-time directors or employers.

An individual on receiving a payment is entitled, on making a claim and proving the relevant facts to the satisfaction of Revenue, to have the total amount of tax payable by him/her for the year of assessment for which the payment is chargeable reduced to the total of the following amounts —

• the amount of income tax which would be payable by him/her if he/she had not received the payment, and
• an amount equal to tax on the whole of the payment computed at a special rate.

The special rate at which the whole of the payment is to be taxed is determined by ascertaining the additional tax payable if 1/3rd of the payment were included in his/her total income for the relevant year, and then dividing this additional income tax figure by a sum equal to 1/3rd of the whole payment. ) Relief is given by repayment. Relief is not available in respect of income the tax on which the claimant is entitled to charge against any other person, or to deduct retain or satisfy out of any payment which he/she is liable to make to any other person.

Breach of employment rights

There is an exemption from income tax in respect of awards and settlement agreements relating to breach of employment rights. If it is the result of a settlement,  must be less than the maximum award.

This exemption is limited to breach of rights in themselves. Contractual entitlements are subject to income tax PRS I and USC. Termination payments are subject to the above-mentioned regime by which exemptions up to certain maximum amounts may be available.

If the matter the subject of a dispute or agreement concerned is a capital asset then capital gains tax may apply.

Awards for personal injuries are subject to exemption under .a separate basis and are not connected with employment as such.