How Severance Pay is Taxed in South Africa
When you get retrenched, you receive a severance package. The good news is that a big chunk of it is tax-free. Here's how SARS taxes your severance pay and how to make sure you keep as much as possible.
Key Takeaways
- The first R500,000 of severance is tax-free (lifetime limit)
- This R500,000 is shared with retirement lump sums — it's not separate
- Amounts above R500,000 are taxed on a special sliding scale
- Severance is taxed separately from your normal salary
- You must complete an IRP5 form for severance pay
The R500,000 tax-free amount
SARS allows the first R500,000 of severance pay to be completely tax-free. But this is a lifetime limit — it's shared with any retirement lump sums you've received before. If you previously withdrew R200,000 from a pension fund, you only have R300,000 tax-free left for severance.
Tax rates above R500,000
If your severance exceeds R500,000 (after using your lifetime exemption), it's taxed on a special scale:
- R500,001 to R700,000 — taxed at 18%
- R700,001 to R1,050,000 — taxed at 27%
- Above R1,050,000 — taxed at 36%
What counts as severance?
Only the actual severance payment qualifies for the special tax treatment. Other amounts paid at retrenchment are taxed differently:
- Severance pay (1 week per year of service) — special tax table above
- Leave pay (unused annual leave) — taxed as normal income
- Notice pay (payment in lieu of notice) — taxed as normal income
- Bonus or 13th cheque — taxed as normal income
How to keep more of your money
If you have a retirement fund, consider transferring your severance into a preservation fund instead of taking cash. This defers the tax until you retire. Also, make sure your employer separates the severance from other payments on your IRP5 — if they lump everything together, you could pay more tax than necessary.
Ready to see your own numbers?
Use the Retrenchment Calculator