The Income Tax Act provides for much more favourable tax treatment of retirement, death or severance benefits. The first severance package of R500,000 is exempt from tax and the amount above R500,000 up to R700,000 is taxed at 18%. An 18% tax is levied on income up to R250,900. Only R25,000 is exempt from tax if an employee makes advance payments to pension funds. Your employer must ask SARS for a tax policy for your severance package. This can be done on eFiling. SARS then takes into account any previous lump sum (if any) to calculate the tax payable on SARS. Q: In the 26. Article published in April by BusinessLIVE “Be aware of the taxes you pay on severance pay (www.businesslive.co.za/bt/money/2020-04-26-seien aware of the tax you will know that the first severance pay of R500,000 paid in case of reductions are exempt from tax. But how does this work in practice? Will my employer apply normal taxes to severance, severance and vacation pay, or R500,000? Is the allowance only applied if you are assessed? I don`t know how long I`ll be unemployed, but I expect to be without income, at least for a while.
Won`t that reduce my taxes? Would it be better to keep the R500,000 tax-free for all the pension benefits I need to access in case I need them before I find work? What if I don`t need it to use it when I retire instead of using it on severance pay? — Anon by email If you are fired, your employer may pay you a lump sum for the termination of your services, and this lump sum may be considered severance pay. From 1 March 2011, special tax rates were introduced for severance pay where the first R315,000 of severance pay was not taxable. From 1 March 2014, the first R500,000 will no longer be taxable. However, the R315,000 and R500,000, as the case may be, could be reduced due to various capital benefits from the pension fund or severance pay received in the past. Employees are strongly advised to remind the current employer of any severance pay or lump sum pension payments paid to them. This means that the total tax allowance of R500,000 is no longer available, Oosthuizen said. Vacation pay, bonuses and severance pay are taxed at standard income tax rates because they are not part of severance pay. Your tax rate depends on the amount you received. Check out the table below to see how much tax you owe.
The Basic Conditions of Employment Act states that your severance pay must include at least one week`s pay for each full year of work. Your severance pay may include your severance pay, vacation pay, any bonus your employer is willing to pay you under your contract, severance pay, tips (a negotiable payment beyond the scope of your contract) and any savings in a pension fund. Once the discussion is over and employers and employees reach an agreement, the employer will have to request a tax policy from the South African Revenue Authority (SARS) to set the tax liability in relation to severance pay, Oosthuizen said. Following the submission, SARS agreed that voluntary severance benefits for reductions would in the meantime be disclosed under the “Severance Benefits – Involuntary Reduction” option on Form IRP3(a) so that the “Severance Pay” table could apply to these lump sums. This is the position as the SARS Closure Guide and forms are updated to reflect the change in SARS practices and policies. According to the South African Revenue Service (SARS), the amount of tax you pay on your severance pay depends on the payment you receive and how often you were withdrawn. Voluntary and involuntary reductions are usually the result of general workforce reductions, downsizing in a certain category or termination of employment by the employer. In most cases, the persons who are withdrawn do not hold more than 5% of the shares or shares of the members of the employer company. We therefore agree with the argument that voluntary severance pay generally meets all the requirements of “severance pay” within the meaning of the Income Tax Act 58 of 1962 (the Act) and should therefore receive the same tax treatment as involuntary severance pay. Tip: Vacation pay and pro-rated bonuses paid at the time of termination are not part of severance pay and are subject to taxation at the normal rates applicable to individuals. Your employer will file a tax policy application with SARS before the lump sum is paid to you. Your employer requests a tax policy by completing an IRP3(a) form and sending it to SARS.
Upon receipt of this form, SARS will calculate the correct amount of employee tax that your employer must deduct from severance pay, and you will receive this benefit less your employer`s taxes. According to SARS, to be eligible for the severance tax rate, your reduction must be due to one of the following reasons: The South African Institute of Tax Professionals (SAIT) recently submitted submissions to the South African Revenue Service (SARS) regarding the tax treatment of amounts received as a result of voluntary reductions. SAIT clarified that voluntary severance benefits are considered severance benefits. “There have also been cases where employers have paid severance pay but do not ask for a tax policy. The employee only becomes aware of the tax liability when he files his tax return months after receiving the amount and SARS imposes it as normal income,” said the compensation specialist. If you are withdrawn, you can choose to withdraw your pension fund, place it in a maintenance fund or transfer it to an old age pension. When you withdraw it, it is taxed according to the table of retirement and severance pay, which means that if your payment is less than R500,000, you will not pay any tax. But if it`s more than R500,000 with your severance pay, you`ll pay taxes.
If your severance pay is less than R500,000, you will not pay taxes. However, if you have received a discount payment in the past and it is R500,000 or more with your current payment, you are taxable. The first severance package of R500,000 is exempt from tax and the amount above R500,000 up to R700,000 is taxed at 18%. In order to qualify for special tax rates for severance pay due to reductions, your employer must have paid you a lump sum because, among other things, your employment relationship has been terminated or lost. It is important to note that everyone benefits from a single tax reduction of R500,000 on the amount of their pension capital (including severance pay, as it is taxed in the same way). When applying the tax schedules, however, all previous retirement and severance benefits must be taken into account. For example, if a taxpayer had received severance pay of R300,000 two years ago, he would have been exempt from tax because he would have fallen below the threshold of R500,000. If he later received an additional pension surplus of R350,000, R200,000 would be exempt from tax (i.e. R500,000 minus the R300,000 he has already used for this limit) and the balance of R150,000 would be taxed at 18% according to the table above. We agree with the proposal to update the SARS Closure Guide to remove the distinction between “voluntary” and “involuntary” cuts, as this distinction does not exist in the definition of “severance pay” in the legislation. The Income Tax Act provides for much more favourable tax treatment of retirement, death or severance benefits.
Submissions were made in response to the recently published IRP3(a) and IRP3(s) Completion Guide (SARS Completion Guide). The SARS Completion Guide helps employers submit tax guidelines, including on the dismissal of employees. .