In 2020, about 2.2 million jobs were lost in South Africa and in 2021, that number is expected to double as a result of Covid-19. With that, we have found that there are many questions surrounding the subject of taxes and severance packages. Here’s everything you need to know.
The Basic Conditions of Employment Act states that your severance pay should include at least one week’s worth of remuneration for every full year of work. Your severance package may consist of your notice pay, leave pay, any bonuses that your employer has agreed to pay you according to your contract, severance pay, gratuities (a negotiable payment that is beyond the realms of your contract), as well as any savings in a retirement fund.
With regards to the notice period, you should be paid for at least four weeks’ notice if you have been employed for more than one year. If you are retrenched, you should still be paid your notice period.
Of your severance package, your severance pay will be taxed like a lump sum in the same way that a retirement fund is taxed.
Here’s how a lump sum of a retirement fund is taxed:
|
Taxable income (R) |
Rate of tax (R) |
|
1 – 500,000 |
0% of taxable income |
|
500,001 – 700,000 |
18% of taxable income above 500,000 |
|
700,001 – 1,050,000 |
36,000 + 27% of taxable income above 700,000 |
|
1,050,001 and above |
1,30,500 + 36% of taxable income above 1,050,000 |
It is important to note that everyone is given a once in a life-time tax relief of R500 000 on their retirement lumpsums (which includes severance pay as they are taxed in the same way). However, all previous retirement and severance lumpsums must be taken into account when applying the tax tables. For example, if a taxpayer received a severance lumpsum of R300 000 two years ago, it would have been tax-free as it fell below the R500 000 threshold. If he subsequently received another R350 000 retirement lumpsum, R200 000 would be tax-free (i.e R500 000 less the R300 000 he already used towards this limit) and the balance of R150 000 would be taxed at 18% per the above table.
Your employer will need to apply to SARS for a tax directive on your severance benefit. This can be done on eFiling. SARS will then take any previous lumpsums into account (if applicable) in order to calculate the tax which must be paid over to SARS.
Your notice pay, leave pay and any bonuses will form part of your remuneration. This means that these amounts will be taxed according to the regular tax margins.
Here’s an outline of the tax margins for the 2023 tax year:
| Taxable income (R) | Rates of tax (R) |
|---|---|
| 1 – 226 000 | 18% of taxable income |
| 226 001 – 353 100 | 40 680 + 26% of taxable income above 226 000 |
| 353 101 – 488 700 | 73 726 + 31% of taxable income above 353 100 |
| 488 701– 641 400 | 115 762 + 36% of taxable income above 488 700 |
| 641 401 – 817 600 | 170 734 + 39% of taxable income above 641 400 |
| 817 601 – 1 731 600 | 239 452 + 41% of taxable income above 817 600 |
| 1 731 601 and above | 614 192 + 45% of taxable income above 1 731 600 |
If you are having trouble understanding the taxes on your severance package, feel free to ask a tax question here.
