# Pay in lieu of notice.



## RS2K

A friend has recently resigned from his position as an Employee of a comapny.

He wrote his resignation, and was told the next day that he could leave immediately, as his notice was being waived. He left to join a competitior.

His contract req'd 1 months notice which he gave.

Is this payment in lieu of notice taxable? 

I feel it's not as it is treated as a termination payment. The old employer paid the months salry through payroll in the ordinary way (taxed) and the Revenue are not being helpful at all.

Is there a piece of legislation somewhere he can quote?


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## ClubMan

RS2K said:
			
		

> Is this payment in lieu of notice taxable?


Yes it is taxable. It's not redundancy.


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## Molly

absolutely its taxable.... on two occasions ive handed in my notice and due to the nature of my job its standard to let you go there and then...got paid my months notice but did not go to work.....no different to working your notice from the tax mans prospective.


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## WizardDr

The issue is whether the employer had a legal obligation to pay it or not. If there is a legal requirement then it is taxed. If there isn't then it looks to me that it would ne treated as a termination lump sum and not be taxable.


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## ajapale

> The issue is whether the employer had a legal obligation to pay it or not. If there is a legal requirement then it is taxed. If there isn't then it looks to me that it would ne treated as a termination lump sum and not be taxable.


DrWizzard, 

What you say here is NOT correct.

The other posters are correct when they state that the sum  IS taxable.

Perhaps you are getting confused with a redundancy situation where the  statutory lump sum is NOT taxed but any discretionary extra severance payments ARE taxable.

ajapale


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## MOB

"Perhaps you are getting confused with a redundancy situation where the statutory lump sum is NOT taxed but any discretionary extra severance payments ARE taxable."

Just to add some clarification: the amount of termination payment which is tax free is not determined by the "statutory redundancy" figure.  A termination payment is tax free up to a prescribed limit - the last time I checked (a good few years ago) I think it was €7,500 (actually it might have been in IR£) plus €500 for each year of service. (Or, if higher, a figure determined by reference to somthing called the "Standard Capital Superannuation Benefit" (?) - I can't remember how to calculate this figure, but I seem to recall it benefits people on high pay and with long service to use it).


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## ajapale

Hi MOB,

Thanks for the clarification.

Yes you are correct and I was mistaken.

In the _specific case_ of statutory redundancy these lump sum payments are exempt.

From the revenue [broken link removed].



> LUMP SUM PAYMENTS
> 
> *What is Taxable* Lump sum payments paid on Redundancy/Retirement are taxable. However, they qualify for special tax treatment. They may be exempt or qualify for some tax relief.
> 
> *Tax Relief*            As follows;
> 
> *1. Basic Exemption*
> The Basic Exemption is *€10160* plus *€765* for              each full completed years service with the employer. If it is the              claimant's *first claim* the Basic Exemption may be increased              by up to €10,000* subject to certain conditions. From *1/1/02*              the increased exemption of *€10,000* may be availed of by              an individual every 10 years.
> 
> *Increased Exemption*
> If claimant is not a member of an occupational pension scheme or has irrevocably given up the right to receive a lump sum from the pension scheme the basic exemption at (1) above may be increased by *€10,000**
> If claimant is a member of an occupational pension scheme the increased              exemption of *€10,000** is reduced by, a) the amount of              any tax free lump from the pension scheme *or* b) the present day value at date of leaving employment of any tax free lump sum which may be receivable from the pension scheme in the future. * Prior to *1/1/02* the increased exemption was *£4,000*.
> 
> *2. Standard Capital Superannuation Benefit*
> This relief benefits those with high earnings and long service. It is about 1/15th of the average annual pay for the last 3 years of service to date of leaving less any tax free lump sum entitlement from the pension scheme.
> 
> *3. Top Slicing Relief*
> Top Slicing is additional relief given to ensure that the lump sum payment is not taxed at a rate higher than the claimant's average rate of tax for the previous 5 years. This relief is claimed *after              the end of the tax year*.
> 
> *Exemptions*
> 
> 1. Statutory Redundancy Payments are exempt from tax.
> 2. Payments made on account of injury or disability
> 3. Payments made when employment consists of foreign service where                certain conditions are met.
> 
> *Refund of Superannuation
> Contributions*             The standard rate of tax of 20% deducted by the pension scheme              is non - refundable.
> (Prior to 5/12/01 rate of tax charged was 25%)
> 
> *Where to Send Claim*                         Use your PPS number to find the postal address for your Revenue                office in our [broken link removed]
> 
> *Reference Material*           [broken link removed]
> Section 123 TCA 1997
> Section 201 TCA 1997
> Schedule 3, Paragraph 10 TCA 1997
> - Treatment of Redundancy Payments
> [broken link removed] - Queries
> [broken link removed] - Pay in lieu of notice
> [broken link removed]
> [broken link removed] - Termination Payments and Legal Costs





> from: [broken link removed]  - Pay in lieu of notice
> Schedule E
> Minimum Notice and Terms of Employment Act 1973 to 1991 -
> what is the taxation treatment of sums paid under this Act?
> Normal Pay/Sick Pay/Holiday Pay
> Tax should be deducted by the employer under PAYE in the normal way.
> Payment in lieu of notice
> This income is chargeable to tax but qualifies for the £8,000 (plus £600 for each complete year of service) exemption (and the additional exemption and reliefs, where they apply) provided for in Section 201 and Schedule 3 TCA 1997.
> However, where the contract of employment provides for a payment of this kind on termination of the contract, whatever the circumstances, such payment is chargeable to income tax in the normal way without the benefit of the exemption and reliefs mentioned above.




ajapale


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## DarraghDuane

I think ajapale should be a bit more moderate in his moderating and reconsider the use of the "red pen". Then he won't look as bad when he gets it wrong.


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## WizardDr

ajapale:
For the record, you need to be aware that on leaving an employement whether you are made redundant or not, certain payments fall into the old Section 110 ITA 1967 which i think described what qualified as a termination lump sum. I stand by comments on the basis of practice. 

Seek to understand the issue before slamming others.


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## ClubMan

I stand corrected too.  I didn't realise that non redundancy termination payments may not be (fully?) taxable in certain circumstances. But would payment in lieu of notice fall into that category under any circumstances and, if so, what would those circumstances be? I would have assumed that such payments would always be treated as normal income and, thus, assessable for income tax.


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## Ham Slicer

ClubMan said:
			
		

> I didn't realise that non redundancy termination payments may not be (fully?) taxable in certain circumstances.



I came a cross a case recently where a guy was being made redundant.  It was advised he was getting one yrs salary(50K) in his termination package and this included everything - statutory (10K), golden handshake(35K), holiday pay(3K), pay in lieu(2K).

The statutory(10K) is already exempt and his tax free lump sum was worked out at 42K - so the other 40K was put through as a severance payment and holiday/lieu payments weren't taxed.

Total tax paid on 50K = 0


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## ClubMan

But this specific case is not a redundancy situation - the employee is resigning. Is that not significant in relation to tax treatment of pay in lieu of notice or other termination payments?


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## ubiquitous

> For the record, you need to be aware that on leaving an employement whether you are made redundant or not, certain payments fall into the old Section 110 ITA 1967 which i think described what qualified as a termination lump sum. I stand by comments on the basis of practice


A very reliable source has recently confirmed to me that this is indeed the case.


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## ClubMan

Interesting - is this a recent development? Can it be claimed retrospectively?


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## DarraghDuane

My understanding is that if you are entitled to any payment under your contract, e.g. pay in lieu, holiday pay, or even some specified amount upon termination, then it's taxable. The reason for this is that because such payments are in your contract of employment there is no doubt that they relate to your employment and are therefore chargeable to income tax.

As regards "ex-gratia" payments, i.e. payments your employer is not required to give to you but does anyhow, these would have escaped the charge to income tax in the past as you were not entitled to these payments, legally or under your contract.  It was therefore necessary to bring these payments within the charge to income tax and S123 of the Taxes Consolidation Act does this. Now, any payments on a termination that are not otherwise chargeable to income tax (i.e any payments other than pay in lieu, holiday pay, etc) are taxable, subject to the exemptions referred to by ajapale.

In my view, therefore, pay in lieu is definitely taxable and the 3k holiday pay and 2k pay in lieu in Ham Slicer's example are also taxable


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## Molly

going back to the original post, 


the person in question handed in notice and due to going to a competitior the employer decided not to have employer work notice ...... this period that the employee was at home but paid, is categorically salary and taxable. 

makes no difference to the tax man that you happened to be at home for this period of time and not physically at work.


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## HardyEustace

This is an old thread but one that now has relevance to my situation.  In reference to the question I encountered a similar situation and was not required to pay tax on my last months salary.  In the previous example, I handed in my notice to go to a competitor and was asked to leave the following day rather than execute my notice.  In my current instance, I was made redundant last week along with about half the company.  We were then told that we could leave that day but that we would be paid four weeks notice.  I am currently arguing that this should not be taxable as upon looking at the revenue site  [broken link removed]   it says  " What lump sum payments qualify for some relief from tax?  The following redundancy and retirement payments, although not exempt from tax, qualify for some relief from tax. These are:      * Salary or wages in lieu of notice, on redundancy or retirement. However, where the contract of employment provides for a payment of this kind on the termination of the contract, whatever the circumstances, such payment is chargeable to income tax in the normal way without the benefit of the exemptions and reliefs mentioned later."  my interpretation would be that the four weeks notice was not statuatory, and therefore is exempt from tax.  However my old employers have said that this is not the case.  I've already contacted the revenue but they really are not inspiring confidence and I'm awaiting a "call from a supervisor"  Could someone please help me with this?


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## Domo

Pay in lieu of notice is taxable if it is mentioned in your contract of employment (i.e. you have a contractual right to receive this).  If it is not mentioned, tax is not payable.

If your employer taxes this incorrectly, I would suggest you make a claim for a refund of this tax, supplying full details from your employer indicating the amount of pay in lieu of notice (payslip) and a copy of your contract of employment to the Revenue.  

I would suggest that you get any confirmation from the Revenue in writing - ask for an email address, and for the local Inspector or Higher Grade to deal with this.


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## HardyEustace

Thanks Domo, however whats throwing me is that they're only offering 28 days and not the 30 days thats written into my contract.  Thus can I take that they broke the contract due to making me redundant and thus are offering me the two weeks only that I'm entitled to by law http://www.entemp.ie/employment/rights/minimumnotice.htm having worked there for just over two years and then the additional two weeks they're giving me can be considered a "top up" of statuatory and thus be tax free.  Or   Should I explain to them that I need 30 days rather than 28 days in order to agree with the terms of my contract.


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## ixtlan

Hi all,

I'll resurrect this again as I have a related issue.

A friend at work is being made redundant. With his years of service he is entitled legally to 4 weeks note. He worked 2 weeks, and got 2 weeks in lieu.

The company says that because his contract says "The company may at it's discretion choose to make a payment in lieu of notice" that this means it is in his contract and must be taxed. They have legal advice to this effect.

Is this really correct?

1/ He would be entited to the 4 weeks legally anyhow, so it would not matter what the contract says. It seems unfair to be taxed just because of the contract. I could see the logic if the contract specified more than the legal notice period, but if not?...
2/ The contract does not guarantee that payment in lieu will be granted. Only at the company's discretion.

Ix.


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## ClubMan

Why do you think that he should not be taxed on such salary payments?!


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## ixtlan

ClubMan said:


> Why do you think that he should not be taxed on such salary payments?!



Well, I know it would seem that it is salary and should be taxed... but the Revenue are the ones suggesting that under certain certain circumstances it would not.

They say "where the contract of employment provides for a payment of this kind on termination of the contract"... then tax is due.

This is confusing... if the contract says we might pay this... at our discretion... then has it provided for a payment of this kind?

On a more general level, what is the logic of this? If the contract does not mention payment in lieu why should it not be taxable, whereas if it does mention it it is taxable? Surely most contracts will mention it? Otherwise the company has to allow the guy to come to work for a few weeks, when they won't want him to. Why penalise the employee for the presense of a clause that benefits the company? 

As I said, if it was always taxable, then fine, it makes sense. However why should the contract matter? unless the notice period exceeds the legal requirement.

I know the answer may be "tax does not make sense" but I just thought I had to ask.

Ix.


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