Calculation of avg tax rate re top slicing relief on a redundancy payment?

P

Pegasus

Registered User
Messages
77
Hello all,
Top slicing relief on a redundancy pament is calculated by reference to the average tax rate for the previous 3 years. The revenue leaflet doesn't spell out how to calculate this.
This could mean various things when tax credits, pension contribs etc come into play. Anyone know?
 
Re: Calculation of average tax rate re top slicing relief on a redundancy pmt?

The formula for top slicing relief is as follows:

A – P x T/I

where:
A = The tax due on the lump sum if taxed in the normal manner
P = The taxable portion of the lump sum payment
T = The total income tax liability of the individual for the 5 years of assessment immediately preceding the year of assessment in which the employment terminated, and;
I = The total of the taxpayer's taxable income for the above 5 years of assessment.
 
Re: Calculation of average tax rate re top slicing relief on a redundancy pmt?

bazermc: Your formula is correct but I still think the one in IT21 is easier to follow (same thing expressed a different way).

Pegasus: The taxable portion of your lump sum will be taxed at your marginal rate, assume 42%. At the end of the tax year, your Top-Slicing Relief will kick in, but you need to ask for it !

If the taxable part of your lump sum is 20,000 then you will pay 8,400 tax up front.

For the preceding 5 years, the calculation is actually very straight forward, especially if you received a balancing statement for those 5 years from revenue. For the 5 years lets say your reckonable income was 40k, 42k, 44k, 46k, 48k (Total income 220k) and even though your marginal tax rate was 42% each year, with ALL of the usual tax credits taken into account, you paid tax of 12k, 13k, 14k, 15k and 16k (total tax 70k), then your average tax rate for the 5 years was 70/220 x 100 = 31.8% so your Top Slicing Relief will be
20k x ( 42% - 31.8% ) = 2,036
​
Your question about tax credits and pension contributions can be answered as follows ...
¬ The relevant tax credits are already taken care of in determining your tax for each of the 5 years. It is treated no differently for the purposes of this calculation
¬ Pension contributions represent a reduction in reckonable income and I stand to be corrected, but I believe it is reckonable income and not gross income that is considered in the calcs for the 5 years.
 
Re: Calculation of average tax rate re top slicing relief on a redundancy pmt?

While It21 states that average tax over the preceding 5 years is used to calculate top slicing tax relief, I've been told only the previous 3 years are now used for this calculation. Does anyone know which is correct? This is in relation to a redundancy payment made in 2004; are the preceding three or is it five years which are used to make the calculation?
 
Re: Calculation of average tax rate re top slicing relief on a redundancy pmt?

*With effect from 1st January 2005, the average rate of tax is calculated over the previous 3 years. Lump sum payments taxable prior to 1st January 2005 are subject to an average rate of tax calculated over the previous 5 years.

This is from IT21 on the revenue.ie website
 
You must log in or register to reply here.
Back
Top