Tax on a retrenchment package: the first R550,000 at 0%
The severance part of a retrenchment package is taxed on the SARS severance benefit table, not through monthly PAYE. The table has not changed for the 2025, 2026 and 2027 years of assessment:
| Severance benefit (cumulative, lifetime) | Tax |
|---|---|
| R0 to R550,000 | 0% |
| R550,001 to R770,000 | 18% of the amount above R550,000 |
| R770,001 to R1,155,000 | R39,600 + 27% of the amount above R770,000 |
| Above R1,155,000 | R143,550 + 36% of the amount above R1,155,000 |
The two things most pages miss
the R550,000 is once in a lifetime, shared with retirement fund lump sums since 1 October 2007 · leave pay, notice pay and a bonus are NOT on this table
The number the employee asks about
The retrenched employee has one question at the exit meeting: how much of this do I keep? Could you show them the table, the directive, and the split between severance and the rest, before the last payslip is run?
The severance tax calculator for the whole retrenchment schedule
Free Excel calculator: enter weekly pay, years of service, the weeks per year, any extra severance and earlier lump sums, and it returns the severance, the tax on the SARS table and the amount after tax, per employee. The PDF is the table with a worked example.
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- Excel
Severance on the table, leave and notice through payroll.
What goes on the table, and what is taxed as salary
A severance benefit is a lump sum from the employer because of retrenchment for operational requirements, the employer ceasing to trade, or the employee’s incapacity, paid to someone who does not hold more than 5% of the employer; or any amount paid on or after age 55 for loss of office. The statutory severance under BCEA section 41 qualifies, and so does an extra agreed amount or a voluntary severance package when the reason is operational.
- On the lump sum table: section 41 severance; additional severance; a VSP for operational requirements.
- Taxed as remuneration (PAYE at the marginal rate): accrued leave paid out, notice pay (worked or in lieu), a pro-rata 13th cheque, commission owed.
- Neither: a reimbursement of expenses actually incurred.
Worked example: 15 years, two weeks a year, first retrenchment
R40,000 a month, 15 completed years, two weeks per year by agreement, plus R50,000 ex gratia
| Weekly remuneration | R40,000 × 12 ÷ 52 (BCEA s35) | R9,230.77 |
| Severance | R9,230.77 × 2 weeks × 15 years | R276,923 |
| Severance benefit | R276,923 + R50,000 ex gratia | R326,923 |
| Tax on the severance benefit | first lump sum in life; under R550,000 | R0 |
| Notice pay (4 weeks) and 12 days’ leave | remuneration, PAYE at the marginal rate | taxed via payroll |
| Severance paid after tax | R326,923 − R0 | R326,923 |
Had the same person taken a R400,000 retirement fund withdrawal in 2019, the cumulative total is R726,923: the first R550,000 is used up, and 18% applies to R176,923, so the tax is R31,846. The retrenchment calculator gives the package; the severance tax calculator download applies the table, earlier lump sums included.
Four retrenchment tax cases, worked with numbers
All on the SARS table for the 2027 year of assessment.
R200,000 severance, no earlier lump sums
Under R550,000: tax R0. Notice and leave pay are taxed through payroll as usual.
R600,000 severance, no earlier lump sums
18% of the R50,000 above R550,000: R9,000. The employee keeps R591,000 of the severance.
R300,000 severance, but a R400,000 provident fund withdrawal in 2021
Cumulative R700,000. Tax on R700,000 is R27,000; tax already attributed to the R400,000 is R0; so R27,000 is due on this severance. The directive application must disclose the earlier withdrawal.
Retrenched director holding 8% of the company
Not a severance benefit (the holder of more than 5% is excluded). The lump sum is taxed as ordinary remuneration unless the age-55 route applies.
The tax directive: what the employer must do before paying
The employer applies to SARS for a tax directive on form IRP3(a) before paying a severance benefit, stating the reason for the payment and the amount. SARS returns the tax to withhold, having applied the cumulative table to the person’s history. Pay without the directive and the employer carries the tax it should have withheld.
- Apply as soon as the package is agreed; a directive takes days, and the last pay run will not wait.
- Show the severance benefit separately on the final payslip and the IRP5 (source code 3901 for a severance benefit), apart from leave and notice.
- For a VSP, state the operational reason on the application; SARS decides whether it qualifies.
Five retrenchment tax mistakes
Taxing the whole package through PAYE
The severance part belongs on the lump sum table, where the first R550,000 is at 0%. Over-withholding costs the employee cash flow until the next assessment.
Putting leave and notice on the table
They are remuneration. A directive application that includes them is wrong.
Forgetting earlier lump sums
The R550,000 is lifetime. Ask the employee about retirement fund withdrawals and earlier retrenchments.
No directive
The employer, not the employee, becomes liable for the tax that should have been withheld.
Calling a negotiated resignation a severance benefit
If the exit was not for operational requirements, incapacity or age 55, the table does not apply.
The package is five numbers from one record
Severance, notice, leave, bonus and the tax split all come from the start date, the salary history and the leave balance. Synthro holds them on the employee’s record and passes the exit to payroll, so the directive application and the final payslip agree.
Frequently Asked Questions
How much tax is paid on a retrenchment package in South Africa?
The severance part is taxed on the SARS severance benefit table: the first R550,000 at 0%, then 18% to R770,000, 27% to R1,155,000 (R39,600 plus 27% of the amount above R770,000) and 36% above that (R143,550 plus 36%). The R550,000 is a lifetime amount, shared with retirement fund lump sums since 1 October 2007. Leave pay, notice pay and a pro-rata bonus are taxed as ordinary salary.
Is the first R550,000 of a retrenchment package tax free?
Yes, once in a lifetime. The 0% band applies to the cumulative total of all severance benefits and retirement fund lump sums the person has received since 1 October 2007. A second retrenchment, or an earlier retirement fund withdrawal, uses up part of it.
What counts as a severance benefit for tax?
A lump sum paid by the employer because of retrenchment (operational requirements), the employer ceasing trade, or incapacity, to an employee who does not hold more than 5% of the employer; and any amount paid on or after age 55 for loss of office. The statutory severance under BCEA section 41 and any extra agreed severance or voluntary severance package amount both qualify when the reason is operational.
Is leave pay taxed as part of the severance package?
No. Accrued leave paid out, notice pay and a pro-rata bonus are remuneration, taxed through PAYE at the employee’s marginal rate in the month paid. Only the severance element goes on the lump sum table. Payroll often shows them on one final payslip, which is why the two get confused.
Does the employer need a tax directive to pay a retrenchment package?
Yes. The employer applies to SARS for a tax directive (form IRP3(a)) before paying a severance benefit. SARS returns the amount of tax to withhold on the lump sum. Paying without the directive leaves the employer liable for the tax it should have withheld.
Is a voluntary severance package taxed the same way?
When the exit is for the employer’s operational requirements, a voluntary severance package meets the definition of a severance benefit and goes on the same table, which SARS has confirmed to the tax professional bodies. A payment that is really a negotiated resignation does not. The directive application states the reason, and SARS decides.
How is severance pay calculated before tax?
At least one week’s remuneration for each completed year of service (BCEA section 41(2)), on remuneration that includes regular allowances, with variable pay on a 13-week average. The retrenchment calculator works it out with notice and leave; this page applies the tax table to the result.
Will the employee get a refund if too much tax was withheld?
The directive sets the withholding, so over-withholding is rare. Any difference comes out in the employee’s annual assessment, when SARS applies the cumulative table to every lump sum received in the year and before.
