What pay includes
Lump sum payments
Payments on retirement or leaving work
You might choose to pay a lump sum payment to an employee who is retiring or leaving work. This payment should be treated as pay if it is more than either:
- the basic exemption and increased exemption (if due)
- Standard Capital Superannuation Benefit (SCSB).
Basic exemption
The basic exemption is €10,160 plus €765 for each complete year your employee has worked for you.
The following items can be counted towards a full years work:
- time worked before and after a career break
- period of job-sharing or part-time work
- for group companies, all work carried out in Ireland.
If your employee has taken a career break this cannot be counted.
Increased exemption
Your employee may claim an increased exemption, up to €10,000, providing they have not received a lump sum payment in the previous ten years.
Your employee may be due to receive a lump sum payment from their pension scheme. You must deduct this lump sum from the €10,000.
If this payment is not due yet, then you deduct the current value of it.
Your employee might have agreed with their pension provider that they will never receive a lump sum payment. They must inform you of this agreement in order to receive the increased exemption.
Standard Capital Superannuation Benefit (SCSB)
SCSB is an additional relief your employee may be entitled to. It benefits employees with high earnings and long service. SCSB is calculated at 1/15 of the average annual pay for the last 36 months in employment. This is multiplied by the number of full years of service. Any tax free lump sums received are subtracted from this benefit.
- Example
Eileen worked with Company X from 6 June 2002 until 8 June 2020 (18 full years). She received a retirement lump sum of €60,000, the first lump sum she has been paid.
Amount of Eileen's lump sum which is tax free
| | Calculation | Value |
|---|
|
Initial amount
|
|
€10,160
|
|
Add €765 for each complete year of service
|
€765 x 18
|
€13,770
|
|
Basic exemption
|
|
€23,930
|
Eileen also received a lump sum of €11,000 from an approved pension scheme. The increased exemption does not apply, because this payment is over the €10,000 limit
Her pay for three years prior to leaving (9 June 2017 - 8 June 2020) was €95,000.
The tax free amount of Eileen's retirement lump sum is calculated by adding the basic exemption, plus the difference between the SCSB and the basic exemption.
Calculation of tax relief on Eileen's retirement lump sum
| | Calculation | Value |
|---|
|
Calculate average annual pay for last three years
|
€95,000/3 |
€31,667
|
|
Calculate 1/15 of the average annual pay
|
€31,667/15 |
€2,111
|
|
Calculate amount due per years’ service
|
€2,111 X 18
|
€38,000
|
|
Deduct the pension lump sum
|
€38,000 - €11,000
|
€27,000
|
|
Deduct the basic exemption
|
€27,000 - €23,930
|
€3,070
|
|
Tax relief
|
€3,070 plus basic exemption
|
€27,000
|
Taxable amount of lump sum is €33,000 (€60,000 - €27,000).
Payment in lieu of notice
A payment in lieu of notice should be treated as pay if it is part of your employee's contract. This payment cannot benefit from the basic exemption.
Payments to compensate for change in work practices
Your employee may be entitled to a lump sum payment as compensation for changing duties. Examples of these changes are:
- a change in work practices with the introduction of new technology
- a transfer of place of employment to a new location.
These payments are included as pay, and taxed in the normal way.
Your employee can claim tax relief on this payment at the end of the year.
Foreign sourced employment income
If your employee has income from a foreign employment and works in Ireland, you must tax this in the normal way.
Income relating to work outside Ireland may be taxable, but this is not your responsibility.
Next: Salary sacrifice arrangements