Tax Implications of Redundancy for Employers and Employees - Part 2

Additional Exemption for the employee: Retraining and Redundancy

An additional exemption of up to €5,000 may be available to an employee who has more than two years full time continuos service, where the employer bears the costs of retraining the employee, as part of a redundancy package. The training must be completed within six months of the employee being made redundant. The employee must avail of the training.
Restriction on basic exemption and SCSB
The Basic Exemption or the SCSB can only be given once against a lump sum from the same employer or associated employer.
Top Slicing Relief
The three reliefs discussed above determine the tax exempt portion of a lump sum received. Once the taxable portion of a lump sum has been determined, top slicing relief ensures that the rate of tax payable on the portion which is taxable is no greater than the average rate of tax paid for the 3 years prior to redundancy or retirement.
Taxable lump sum * (tax rate applied to lump sum – average tax rate paid for the previous 3 years) = amount of top slicing relief.
Example:
If Joe’s taxable lump sum is €20,000 he will be taxed in the current year on this at the marginal rate (say 41%, i.e. €8200. If his  average rate of tax paid  (taking into account tax credits etc) over the previous three years was say 30%, tax on the €20,000 will be restricted to €20,000 * 30% i.e.€6,000
Note: this relief is claimed at the end of a year and is paid as a rebate.

Employer Perspective:

 Revenue Approval (three reliefs):
In relation to the basic exemption, or if higher, the alternative SCSB exemption, specific prior Revenue approval is not required.
Revenue approval is, however, required for an increase in €10,000 over the basic exemption.
Refund of certain elements of Statutory Redundancy:

Employers who pay the statutory redundancy entitlement and give proper notice of redundancy (at least two weeks) are entitled to a 60% rebate from the Social Insurance Fund, into which they make regular payments themselves through P.R.S.I. contributions. The Redundancy Payments Section of the Department processes applications for these rebates (see Form RP50).

This rebate is available in respect of each redundant employee.

Tax Deductibility:

Redundancy payments are tax deductible as business expenses, provided the company is not being wound up.

Reporting requirements on Employers

Details of all lump sum payments made and treated by employers as exempt by reference to section 201 (2)(a) TCA 1997 and made after 25 March 2005 must be reported to the Revenue Commissioners not later than 46 days after the end of the year of assessment in which the payment was made.

The details to be forwarded to the appropriate tax district responsible for the income tax affairs of the employee / office holder are:
 
• The name and address of the person to whom the payment was made;
• That person’s personal public service number (PPS no.);
• The amount of the payment made; and
• The basis on which the payment is not subject to tax. In circumstances where the payment is on account of injury or disability, particulars of the injury or disability must also be indicated.

Section 19 Finance Act 2005 introduced a mandatory reporting requirement for employers in relation to such payments and is effective for all such payments made on or after the 25 March 2005.

Source: Institute of Certified Public Accountants in Ireland (CPA), www.cpaireland.ie

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