Are you Aware of the Tax you’ll Pay on your Severance Package if you Get Retrenched?

Let’s get straight into some of the financial implications of Covid-19: Economists are predicting that anywhere between 350 000 and 1 million people in South Africa could lose their jobs because of this pandemic.

The numbers are staggering.

If you’re one of the unfortunate South Africans who has already been retrenched, or this is something you think you could be facing in the coming months, listen up, as the following may apply to you.

The final payment package you get may include the following:

Severance pay
Notice pay
Possibly a gratuity of some kind
If applicable, you’ll also be allowed to take whatever you’ve accumulated during your time of employment in the company pension fund. You can either draw this money out (and be taxed accordingly), transfer the fund to another Retirement Annuity or Preservation fund in your own name or move it to the retirement fund at your new employer.

Severance pay, according to the Basic Conditions of the Employment Act, stipulates that you must receive at least one week’s remuneration for every completed year of service at the company. Also, if you work your notice period, you must be paid for it. If you decide to leave the job immediately, you should be remunerated for the notice period that is mentioned in your employment contract. If you have accumulated any leave, it should also be paid out to you.

Did you know that you will have to pay tax on your severance package?

It’s important to know that your notice payment, any accrued leave pay and any other amount mentioned in your employment contract, all form part of your remuneration package and will be taxed according to your marginal tax rates.

Your severance package (and any other form of gratuity you get) will be taxed in the same way as a lump sum you receive from your pension fund.

Money paid out to you will only be considered as a severance package if it is paid to you for the termination of your employment under the following conditions:

You are retrenched only because your employer has closed their business, or if your role becomes unnecessary when your employer reduces the number of staff members.
You are over the age of 55.
You are permanently disabled and unable to continue working.

If you are voluntarily or involuntarily retrenched, the tax implications will be the same. But do not offer to resign before you accept a retrenchment package, as this will affect the tax you pay.

Another important thing to take note of is that if you have more than 5% shareholding in the business you’re being retrenched from, you’re not allowed to receive a severance package.

The good news in terms of severance payments is that the first R500 000 you receive will be tax-free.

If the amount you receive is larger than this, you’ll be taxed as follows: