How are you taxed on your retrenchment package?

Unemployment is one of the biggest problems in South Africa. The emergence of Covid-19 has exacerbated the situation, with a lot of companies retrenching their employees.

Should you be retrenched, you’ll receive a retrenchment package, but do you know how much tax you’d owe? JustMoney looks at the various components of a retrenchment package, and how these are taxed.

Tip: Calculate how much you’ll take home after tax by using our tax calculator.

Severance pay

According to the South African Revenue Service (SARS), the amount of tax you pay on your severance depends on the payout 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 a retrenchment payment in the past, and this, together with your current payout, is R500,000 or more, you’ll be liable for tax.

When calculating your tax, SARS takes into consideration any lump sums you’ve received, including your retirement withdrawals. The table below indicates how much tax you’re liable for on your combined 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

According to SARS, to qualify for the severance tax rate, your retrenchment must owe to one of the following reasons:

The employer ended, or is intending to end, operations
The employer has embarked on a retrenchment exercise in order to reduce its head-count
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.

However, if at any time you have 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 pay, and notice pay

Leave pay, bonus pay, and notice pay are taxed at normal personal income tax rates, as these don’t form part of severance pay. Your tax rate will depend on the amount you’ve received. Check the table below to see how much tax you’ll owe.

Taxable income (R)	Rates of tax (R)
1 – 216,200	18% of taxable income
216,201 – 337,800	38,916 + 26% of taxable income above 216,200
337,801 – 467,500	70,532 + 31% of taxable income above 337,800
467,501 – 613,600	110,739 + 36% of taxable income above 467,500
613,601 – 782,200	163,335 + 39% of taxable income above 613,600
782,201 – 1,656,600	229,089 + 41% of taxable income above 782,200
1,656,601 and above	587,593 + 45% of taxable income above 1,656,600

*Source: South African Revenue Service

Pension and provident fund

When you get retrenched, you can choose to withdraw your provident fund, 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 that if your payout 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?

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 the tax deduction will be calculated. Your employer will then issue you with an IRP5 tax certificate that you can use when submitting your annual income tax return.

How are you taxed on your retrenchment package?

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