The current legislation in relation to tax relief in respect of redundancy lump sum payments is section 201 of the Taxes Consolidation Act, 1997. 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 actuarial 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. The SCSB is calculated as 1/15th 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.