Tax on lump sum payments explained

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

This guide explains how redundancy and termination payments are taxed in Ireland,. with examples to show how the taxable amount is calculated.

A lump sum payment is a one-off payment made to employees, often when they retire, are made redundant, or leave employment under other circumstances. In Ireland, this lump sum can be part of your retirement benefits or to compensate for loss of employment. 

The tax treatment of a lump sum depends on the type of payment, your years of service, and any previous lump sums you might have received.

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. The tax on ex-gratia payments depends on which exemption you may be eligible for.

This guide focuses mainly on taxation of lump sum payments received on leaving employment. Different rules can apply to pension lump sums and foreign or non-resident pensions, particularly where double taxation agreements are involved.

It depends. Some payments are always tax-free. Others may be partly exempt or taxed as normal income.

Always tax-free

Provided they meet the conditions set out by Revenue, the following payments are not subject to income tax, universal social charge (USC), or pay-related social insurance (PRSI):

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

• Certain legal or employment law payouts that Revenue treats as tax-exempt

• Lump sums paid where employment has been terminated because of work‑related injury or disability. These are exempt from tax up to a lifetime maximum (generally €200,000)

May be partly tax-free

With some non-contractual lump sums, you may be able to reduce the tax due on the payment using tax relief.

• Ex-gratia redundancy paid on top of statutory redundancy

• Non-statutory termination payments

• Retirement lump sums connected with leaving employment

• Payments for loss of office or changes in working practices 

Taxed as normal income

The following are usually taxed like ordinary pay:

• Payment in lieu of notice, if it’s included in your employment contract

• Outstanding salary, bonuses, or holiday pay paid after employment ends

When it comes to tax on redundancy in Ireland, additional lump sums beyond the statutory payment may be taxable. How much tax you might pay depends on a few details around your employment history and any tax-free termination payments you’ve received before. It also depends on how much the payment is.

All these factors determine whether you qualify for one of the tax reliefs. Exemptions are available that can significantly reduce the tax you have to pay on a lump sum. Because of this, it’s important to understand how Revenue works out the taxable portion of a lump sum.

When calculating tax on a lump sum payment, there are three main tax reliefs available.. The single highest exemption you qualify for is applied.

The three relief options are:

• Basic exemption

• Increased exemption

• Standard Capital Superannuation Benefit (SCSB)

Whichever of these gives you the largest tax-free amount is the one that applies to your lump sum payment.

It’s important to keep in mind that the maximum amount eligible for exemption under any of the three relief options is €200,000. This is a lifetime limit, and it applies across all employers. For example, if you received a tax-free termination payment of €200,000 from a previous employer, your limit is already used up, and any current or future lump sums will be subject to tax. This will start at the standard tax rate of 20%, and anything above €500,000 is taxed at the individual’s marginal tax rate, e.g. 40%. The taxable portion does not count for PRSI, but it is subject to the Universal Social Charge.

Tax treatment varies depending on your personal circumstances. You may wish to consult a qualified independent tax professional.

To calculate the basic exemption from tax on a termination payment, you start with a base amount of €10,160 and add an extra €765 for each full year you worked for your employer. 

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 choose to give up your right to the tax-free lump sum.

You might 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 annual 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

Example: which exemption applies?

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 any exemptions or tax relief calculated, will be subject to income tax. The income tax is charged in the year you receive the payment, which isn’t always the same year your employment ends.

The taxable portion of your lump sum is added to your income for that year and taxed at your applicable income tax rate. 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. If it falls within your lower tax band, you’ll be charged at the lower 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 a non-statutory 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. Any part of the lump sum that is taxable is deducted through payroll via the PAYE system when the payment is made.

If you believe your employer hasn't applied the correct exemption, or has taxed your lump sum incorrectly, you can contact your Revenue office or review the payment details by logging in to your myAccount on the Revenue website. Revenue can then reassess the tax and issue a refund if needed.

Once you’ve paid any taxes due on your termination of employment payment, what you do next will usually depend on how soon you may need access to the money and your longer-term financial plans.

If you don’t need immediate access to your cash, a fixed term deposit account offers a fixed interest rate for a set period, but 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  gives you the flexibility to withdraw or top up your funds as needed while still earning interest on your balance.

Another option some people consider is making an extra contribution to their pension. In some cases, pension contributions may offer tax advantages, but there may be limits on the amount you can contribute in any given year.

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

With Raisin, you can easily compare savings accounts with competitive interest rates from a wide range of banks. 

Savings accounts at Raisin are offered by banks that participate in the national deposit guarantee scheme of their respective country, which protects deposits of up to €100,000 per depositor, per bank. This means that, depending on the amount you’re saving, you may be able to spread your funds across different banks while staying within the protected limit.

Simply register for a free Raisin Account, deposit your funds, and start putting your savings to work.