Leave Payout Tax Calculator South Africa

Reason for Leaving and Tax Rate

First of all, the reason for employees leaving their current employer makes it easier for you to understand the type of tax regime that will be applied. Some of them are explained below.

Resignation

When a person resigns, his/ her final payments will be made in the form of a pay-out package, pro-rata bonuses, or notice pay, depending on the company’s policy. All these types of packages are subject to normal income tax. Hence, there is no need to apply a special tax on this payroll.

Operational Requirements

This category covers both redundancy and retrenchment, as they are a result of the company’s operational conditions. In this case, the HR department of your company applies rules directed by the Labor Relations Act of 1995.

Mutually Agreed Separation

When employer and employee reach a mutual settlement to avoid legal disputes, a gratuity is given. It’s guided by section 41 of the Basic Conditions of Employment Act. Since it’s not a severance benefit, part of it may be tax-free and treated as normal remuneration.

How Do Retrenchment Taxes Work?

When an employee’s service ends or he is retrenched, the employer must pay a lump sum for the termination of service, which is considered a severance benefit. Ever since March 2011, the government of South Africa applied special tax rates on these benefits. As of March 2023, the first R550,000 amount was not subject to tax.

This amount can be reduced in case the retirement fund lump sum or severance benefits were received by an employee in the past. Also, please note that prorate bonuses and notice pay are paid at the time of employment termination. Hence, they are not considered a part of the severance benefit, making you eligible for only paying normal tax rates.

According to South African Revenue Services or SARS, the current tax rates on leave payouts are as follows. These tax rates will remain effective until February 28, 2025.

You can always consult with your company’s HR department to check whether the retrenchment amount will be subjected to a tax directive from SARS. This way, you can easily calculate the tax rate on the payroll package.

Who Can Benefit from Special Retrenchment Tax Rates?

To qualify for the retrenchment benefit, your employer must have paid a lump sum following the termination of your employment. In addition to this condition, you can also qualify for tax incentives in the following cases.

• If you were retrenched at the age of 55 years.
• If your retrenchment came as a result of you becoming permanently incapable of employment.
• If your retrenchment came following the employers stopping its trade.

How to Declare the Lump Sum Payment?

Now, the question is, how can you get this lump sum payment? Well, it is pretty straightforward; your employer submits a tax directive proposal to SARS by filling in the IRP3(a) form before releasing the lump sum for you. Once they receive a receipt of the form, SARS will work out the amount you will receive after cutting the net tax on it.

After this, your employer will issue an IRP5 tax certificate on which the gross benefit amount will be mentioned along with the deducted employee tax. Using this, you can declare this lump sum and receive the money from your employer.

In essence, I have stressed two points in this article, the first being your reason for the employment termination, which will determine how your final payment will be taxed. Similarly, the second one is how to calculate these taxes. I hope this guide has helped employees who were unsure of how to derive their leave payout taxes.