Retrenchment Package Calculation South Africa: The Complete Guide (Including Allowances, Commission and Tax)

The formula for retrenchment severance pay looks simple: one week's remuneration for every completed year of service (BCEA Section 41). But "remuneration" is not the same as basic salary. That gap is where most South African employers underpay, trigger a CCMA referral, and face an order to pay the shortfall plus interest. Published: June 2026.

What "Remuneration" Legally Includes

Section 1 of the BCEA defines remuneration as any payment in money or in kind made or owing to an employee in return for work. For severance purposes this includes: basic salary, fixed monthly housing or accommodation allowance, fixed monthly travel or car allowance, fixed monthly cell phone allowance, medical aid employer contributions paid as a cash supplement to the employee. It excludes reimbursements of actual costs and one-off discretionary payments.

Severance Calculation for a Basic Salary Employee

Weekly remuneration = monthly salary divided by 4.333. Severance = weekly remuneration multiplied by completed years of service. Example: R22,000 monthly salary, 4 completed years. Weekly rate: R5,078. Severance: R20,312.

Severance Calculation for an Employee with Regular Allowances

All regular allowances are added to basic salary before calculating the weekly rate. Example: R35,000 basic + R3,200 travel + R800 cell phone = R39,000 total monthly remuneration. Weekly rate: R9,000. For 6 completed years: R54,000 severance. Calculating at basic salary only would produce R48,462 — a R5,538 underpayment. That shortfall generates a CCMA claim.

Severance Calculation for Commission and Variable Pay Earners: The 13-Week Average Method

For employees with variable income, the accepted method is to calculate the average weekly remuneration paid over the 13 calendar weeks immediately before retrenchment. Total remuneration over 13 weeks divided by 13 = weekly average for severance purposes. Example: 13-week total of R131,700 gives a weekly average of R10,131. For 5 completed years: R50,655 severance. Calculating at basic salary only would produce R17,308 — a 3x underpayment. CCMA commissioners are fully aware of this calculation and regularly order the shortfall to be paid.

Leave Payout: A Separate Obligation

Untaken annual leave must be paid out under BCEA Section 40. This is separate from severance and is taxed as normal income (PAYE). Formula: untaken days divided by 21.67 multiplied by monthly salary.

SARS Tax Treatment

Severance pay under BCEA Section 41 qualifies as a severance benefit under the Income Tax Act Section 10(1)(x). The first R500,000 of cumulative lifetime qualifying severance benefits is tax-free. Leave payout and notice pay are taxed as normal income at the marginal PAYE rate. Apply for a SARS tax directive before paying severance to ensure the correct withholding rate is used.

Section 189 Consultation: Required Before Any Termination Letter

Before retrenching, an employer must issue a written Section 189(3) notice to affected employees stating: reasons for retrenchment, alternatives considered, number and categories of employees affected, proposed selection criteria, and proposed severance calculation. Genuine consultation must follow before any termination letter is issued. A single letter combining the Section 189(3) notice and termination is the most common procedural error, making the dismissal procedurally unfair.

UI-19 Form: Mandatory Employer Submission

Employers are required to complete and submit a UI-19 form (Details of Employees) to the Department of Employment and Labour. This enables the retrenched employee to access UIF benefits. Non-submission is a separate statutory breach enforceable by the Department.

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