Tax on lump sum payments explained

Have you received a lump sum, whether through retirement, redundancy, or otherwise? In Ireland, a retirement or termination payment is either tax-free or subject to partial tax relief.

On this page, we’ll be focusing on the lump sum payment on leaving employment due to redundancy, how this is taxed, and what you might have to pay. We’ll also look at ways you can make the most of your redundancy lump sum.

A lump sum payment is a one-off payment paid in a large sum to employees when they retire or are made redundant. In Ireland, this lump sum can be part of your retirement benefits or to compensate for loss of employment. The amount you receive and the tax treatment of these payments depend on various factors, such as your years of service and average earnings.

Whether you were made redundant with a permanent contract or a fixed-term contract, you will typically receive a statutory redundancy payment in Ireland, which is tax-free. On top of that, your employer may give you an ex-gratia payment as a gesture of goodwill. Taxation of ex-gratia payments depends on which exemption you may be eligible for.

It depends. If the termination payment is made while you’re still under an employment contract, it will be subject to income tax at your usual rate. 

However, there are some exceptions where lump sum payments are never taxed. These tax-free termination payments include:

• Statutory redundancy lump sum payments, provided the employee has worked for that employer for at least two years

• Ex-gratia payments (up to a limit of €200,000) made by the employer if the employee becomes injured or disabled during employment, leading to termination of employment

• Certain payments as a result of employment law rights claims

These redundancy payments in Ireland are exempt from both income tax and the universal social charge (USC).

For other types of termination of employment payments, you can benefit from a range of exemptions that make some of your payment tax-free.

When it comes to tax on redundancy in Ireland, additional lump sums beyond the statutory payment may be taxable. However, there are exemptions available that can significantly reduce the tax you have to pay on these lump sums.

This tax relief is generally available on the following redundancy payments:

1. Ex-gratia payments: This is a non-statutory payment made to an employee on top of the statutory redundancy payment. This usually applies to those leaving their company in the event of retirement, redundancy, or a significant change in their employment status. 

2. Payment in lieu of notice: If this payment is included in your employment contract, it’s considered regular income and therefore not eligible for tax relief. However, if it’s not included, it might be counted as part of your lump sum termination payment, which would then qualify for tax exemptions.

When calculating tax on a lump sum payment, there are three main tax relief options available, and you can claim the highest one you qualify for. 

So you get whichever is the higher of:

• Basic exemption

• Increased exemption

• Standard Capital Superannuation Benefit (SCSB)

It’s important to keep in mind that the maximum amount eligible for exemption under any of the three relief options is €200,000. For example, if you received a tax-free termination payment of €200,000 from a previous employer 10 years ago, your limit is already used up, and any current or future termination payments will be subject to tax. This will start at the standard tax rate of 20%, and anything above €500,000 is taxed at the marginal tax rate of 40%.

To calculate the basic exemption from tax on a redundancy payment, you start with a base amount of €10,160 and add an extra €765 for each full year you work for your employer. So, as long as your termination payment is not greater than this amount, you will not have to pay tax on it. 

Full service includes any time worked before or after a career break, periods of job-sharing, and part-time work.

Relief from tax on your lump sum payment is increased if you meet certain conditions. This increase amounts to €10,000 on top of the basic exemption.

You have to meet the following conditions to qualify for the increased exemption:

1. You must not have received a tax-free lump sum in the last 10 years.

2. You must not be receiving a lump sum pension payment now or in the future. 

If you are part of an occupational pension scheme, however, any tax-free sum you may be entitled to receive under the scheme will be deducted from the increased exemption. You can of course choose to give up your right to the tax-free lump sum offered by your company pension.

Calculating the Standard Capital Superannuation Benefit (SCSB) involves averaging your annual pay over the last 36 months of employment and multiplying it by the number of years you’ve been with your employer.

You are likely to qualify for this tax exemption if you have put in many years of service or you have a high income. Using the SCSB calculation, you can check whether the amount is greater than either the basic or increased exemption. Similarly to the increased exemption, if you’ve received or are entitled to any tax-free lump sum payments from your workplace pension, these are subtracted from the SCSB.

This is the SCSB calculation step-by-step:

(A x B) / 15 - C

A = Your average pre-tax salary earned over the last 36 months

B = The number of completed years of service

C = Any tax-free lump sum you’ve received or are entitled to receive under your employer’s pension scheme

Say you were made redundant after 20 years of service. You received a lump sum termination payment of €120,000, and this was your first lump sum. In addition to this payment, you received a lump sum of €30,000 from your occupational pension scheme. Your average pay for the last three years before leaving work was €50,000.

Check to see which exemption is highest and therefore applies:

Basic exemption: Calculated as €10,160 + €15,300 (€765 x 20 years) = €25,460.

Increased basic exemption: This doesn’t apply since you are receiving a lump sum payment from your company pension scheme.

SCSB: Calculated as €50,000 x 20 ÷ 15 - €30,000 = €66,666.

In this scenario, because the SCSB tax relief of €66,666 is higher than the basic exemption, the SCSB is more beneficial to you.

So, the taxable amount on the €120,000 lump sum is €53,334 (€120,000 - €66,666).

Any part of your lump sum that’s taxable, i.e. the amount that is above the tax relief calculated, will be subject to income tax in the year your employment ends. The income tax on these payments is due when you actually receive the payment, which is not always when your employment ends.

If you’re already paying income tax at the higher rate, any additional income from the lump sum will be taxed at that higher rate.

While the taxable portion of your lump sum doesn’t count as income for social insurance (PRSI) purposes, it is subject to the universal social charge (USC).

When an employer gives an ex-gratia lump sum termination payment to a former employee, they can use the basic exemption, increased basic exemption, or SCSB without needing prior approval from Revenue. However, they must make sure the employee qualifies for the exemption before applying it.

If you’re an employee who believes you should be eligible for an exemption, but your employer hasn't granted it, you can request it by contacting your Revenue office or logging into your account on the Revenue website.

Once you’ve paid any taxes due on your termination of employment payment, you have various options for the remaining balance. If you don’t need immediate access to your cash, you might consider investing in a fixed-term deposit account. While these accounts tend to yield competitive returns, remember that withdrawing your funds is usually only possible at the end of the term.

If you think you might need access to your cash at short notice, a demand deposit account might be more suitable. These accounts provide interest on your deposit while giving you the flexibility to withdraw or top up your funds as needed.

Keep in mind that many of these accounts offer a maximum deposit amount of €100,000. This is to protect your deposit, in line with the deposit guarantee scheme.

When deciding what to do with your lump sum payment, it can help to get advice from a tax or financial advisor.

With Raisin Bank, you can easily compare savings accounts with high interest rates from a wide range of banks. Simply register for a free Raisin Account, deposit your funds, and watch your money grow!