Since 1 March 2011, special tax rates apply to severance benefits, based on the retirement lump sum tax table. This means that the first R500 000 is not subject to tax, the next R200 000 is taxed at 18%, the subsequent R350 000 at 27% and all amounts above R1 050 000 at 36%. Leave pay and pro-rata bonuses that are paid at that time do not form part of a severance benefit and are subject to normal income tax.
To qualify for this special “severance” tax rate, the employer must pay you a lump sum as a result of your employment having been, amongst other things, terminated or lost, for example if:
It is important to understand that this severance benefit is, for tax purposes, treated as a retirement lump sum payment. This has the following consequences:
Retrenchment benefits.The retrenchment benefit refers to the withdrawal from your employer’s retirement fund at retrenchment (as per the above criteria). Such a retrenchment benefit is also taxed per the retirement lump sum tax table, again subject to the cumulative value of any previous retirement fund withdrawals made. Important caveat: You can transfer this benefit to a preservation fund, but if you do, it loses its “identity” as a retrenchment benefit. Although you will be entitled to make one full or partial withdrawal from the preservation fund before retirement (earliest age 55), this will be taxed as a normal withdrawal from the preservation fund, per the withdrawal lump sum tax table: the first R25 000 is not taxed, the balance to R660 000 is taxed at 18%, the balance to R990 000 at 27% and the remainder at 36%. This is an important consideration! If you choose to preserve your retrenchment benefit with the intention of accessing this money before retirement, you lose out on the-tax free benefit you could have enjoyed, either at the time of retrenchment or at retirement. To get advise on your severance benefit, please contact Kevin or Ray, email: [email protected] tel no: (011 658-1333) Source: 10x
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