What type of retrenchment benefit can you expect, and will it be taxed?
The unemployment rate in South Africa is sitting just below 30%. That’s a staggering statistic and the highest jobless rate since the first quarter of 2003. And if you think finding a job is a tough prospect nowadays, simply hanging onto your job is becoming equally as difficult.
According to the latest Old Mutual Savings & Investment Monitor (annual report on savings and household income in South Africa) there has been large scale retrenchment with more to come. In March 2019 Standard Bank announced dozens of branches would be closing, affecting 1200 jobs. Group Five filed for bankruptcy protection, and Tongaat Hulett issued retrenchment letters to over 5000 employees.
Have you been affected by the mass layoffs happening around the country?
If you haven’t, you probably know a friend or family member who has been asked to clear their desk out recently.
In this blog post we are going to address two questions every South African should know the answer to, in tough economic times like these:
- If I’m retrenched, what payments can I expect from my employer?
- Is my retrenchment benefit taxed?
Let’s answer the first question before moving onto the question of tax.
If you find yourself on the end of a retrenchment notification letter, left by Human Resources on your desk, these are the payments you are entitled to:
- Severance Pay
A retrenched employee must be paid at least 1 week’s pay for each completed year of ongoing service. However, the employer must pay the retrenched employee the amount specified in their employment contact, if that amount is larger than the 1 x weeks pay for each year calculation.
Here is a quick example to illustrate the calculation.
Sarah is employed at ABC (Pty) Ltd. She has worked for them for exactly 10 years and earns R20 000 per month. If she is retrenched the company would need to pay a severance package equal to:
1 x weeks salary for every completed year of service
R20 000 per month income / 4 weeks in a month = R5000 weekly wage
X 10 years’ service = R50 000
You are also entitled to all your leave pay.
- Other Pay
Depending on your employment contract, you might be entitled to other benefits like a bonus or pension. This would need to be paid out to you on a pro-rata basis or the fund value of your pension fund at the time of being retrenched.
Remember that because you pay UIF, you are entitled to claim UIF once you are unemployed.
Now onto the question of tax. Will your retrenchment / severance package be taxed?
Under the Income Tax Act, severance benefits are treated as lump sums paid to you on retirement.
You get the first R500 000 tax-free and the balance is taxed at rates of 18%, 27% and 36%, depending on the amount.
To qualify for the benefit, your employer must be letting you go because it has stopped carrying out an area of its business, or because it is generally reducing staff or a certain class of staff.
We hope that you found this article to be useful.
Until next time.
The Moneyshop Team