Written Answers. - Tax Reliefs.
Noel Ahern
Question:
75
Mr. N. Ahern
asked the
Minister for Finance
the current tax exemption given on the taxation of redundancy or retirement lump sums; when the current regulations were introduced; if these regulations are indexed linked or adjusted for inflation; if he will consider adjusting them; and if he will make a statement on the matter.
[2932/97]
I am informed by the Revenue Commissioners that the current legislation in relation to tax relief in respect of redundancy lump sum payments is section 115 of the Income Tax Act, 1967, as amended by section 8 of the Finance Act, 1993. The exemptions and reliefs in respect of redundancy lump sum payments to which an individual may be entitled are briefly as follows:
(i) Basic Exemption
The first £6,000 plus £500 for each complete year of service in respect of that particular employment is exempt from income tax.
(ii) Increased Exemption
The basic exemption may be increased by a maximum of £4,000 if no claim for relief has been made in respect of a previous lump sum payment, and no tax-free lump sum has been received or is receivable under an approved superannuation scheme relating to the office or employment. If a tax-free lump sum of less than £4,000 has been received or is receivable from the scheme, the increased exemption will be the basic exemption plus £4,000, less that amount or, in the case of deferred benefits, the acturial value of that amount.
As an alternative to the above reliefs a taxpayer may, if more favourable, claim an amount known as the standard capital superannuation benefit SCSB. The SCSB is calculated as 1/15 th of the person's average yearly salary, i.e. averaged over the last three years of service, per complete year of service, less any tax free lump sum which is received or receivable under any approved or statutory pension scheme. Further relief may arise where an individual has foreign service.
If a taxpayer is liable to tax on part of the redundancy payment he or she is also entitled to top slicing relief. This means that any amount of the payment liable to tax is charged, not at the taxpayer's marginal tax rate for the year in which he or she is made redundant, but at an average tax rate calculated by reference to the previous five years.
Lump sums payable from approved occupational pension schemes are not chargeable to tax under section 115 (2) (d), Income Tax Act, 1967, as amended by the Finance Act, 1972, Schedule 1. However, these lump sums must be paid within strictly approved limits. The maximum benefit which may be paid to any individual at normal retirement age is 1.5 times final remuneration. This maximum benefit is conditional on the individual having completed at least 20 years service with the employer up to normal retirement date.
The above information summarises the regulations governing tax relief available for redundancy and retirement lump sum payment which are rather complex. Further information may, however, be obtained directly from the Revenue Commissioners if required.
The exemptions and reliefs available in respect of lump sums payable from approved occupational pension schemes and redundancy payments calculated by means of the SCSB are indexed to the extent that they are calculated in relation to a person's salary. In regard to the basic exemption limits for redundancy payments, I would draw to the Deputy's attention that major changes were made in the tax treatment of redundancy lump sum payments in 1993. These changes included the introduction of the further tax free addition of £500 per completed year of service in the employment, to the previous tax basic allowance of £6,000 — or £10,000 in certain circumstances — as well as improvements in the alternative SCSB. These changes resulted in very significant improvements in the tax treatment of redundancy lump sums, particularly as they apply to workers with a number of years service. For example, the minimum amount allowable tax free to a worker with 12 years service doubled from £6,000 to £12,000. In the circumstances I do not consider that an increase in the existing tax free redundancy lump sum exemption is justified at this time.
