What is Tax On Retrenchment?
A severance benefit is the amount of money you receive from your employer as a result of the retrenchment process. In terms of the Basic Conditions of Employment, it is equivalent to at least one week’s remuneration for every full year worked at your current employer.
This severance benefit cash lump sum can also be paid to someone who is being offered early retirement (they must be 55 years or older), or whose employment is terminated due to permanent incapacity (such as in the case of terminal illness).
Tax On Retrenchment Packages In South Africa
As the severance benefit and retrenchment cash lump sum benefits are taxed according to the retirement tax table, the first R500 000 of your taxable retirement fund lump sums is taxed at 0%. However, the tax-free R500 000 is a once-off concession over your lifetime.
The retirement tax table is only applied to lump sums taken when you are retrenched, when you retire, or on your death.
This means that at a new company in the future, if you are retrenched again or you retire, the concession will not apply if you already received a prior severance benefit lump sum of R500 000 or more during the first retrenchment (after 1 March 2011). If your severance benefit lump sum was, say R200 000, then it means that you have a tax-free concession on a lump-sum benefit of up to R300 000 on a subsequent retrenchment or at retirement.
How does tax work on retrenchment in South Africa?
Your employer will apply for a tax directive by filling in an IRP3(a) form and sending it to SARS.
Upon receipt of this form, SARS will work out the correct amount of employee tax that your employer must withhold on the severance benefit, and you will receive that benefits net of tax from your employer.
How is retrenchment severance pay calculated in South Africa?
Under South Africa’s Basic Conditions of Employment Act (BCEA), specifically section 41(1), a retrenched employee is entitled to severance pay equivalent to at least one week’s remuneration for every year of completed service with the employer.
What happens to employees when a company closes in South Africa?
Severance Pay
An employee whose services have been terminated in this manner is entitled to claim severance benefits as if they were dismissed for operational reasons, from the employer’s insolvent/liquidated estate in terms of section 41 of the Basic Conditions of Employment Act.