Redundancy: Can Ex Gratia payment include your bonus

[Dave Byrne]

So I'll soon be receiving my redundancy along with my final month's pay which will also include my final annual bonus. The question is, can my bonus be paid as part of my ex Gratia payment and thus benefit from a more favorable tax treatment. The bonus is not guaranteed under my employment contract, which may have classified it as salary (and as such, taxable at the marginal rate).

 

[SlugBreath]

Use your three best P.60's over the past ten years to calculate your average pay for tax purposes.

https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-05/05-05-19.pdf

 

[Dave Byrne]

I understand my SCSB tax allowance calculation. The question is, should my employer simply rebadge my bonus as an additional ex Gratia payment to avail of a more favorable tax treatment (i.e. Tax free)?

 

[torblednam]

Strictly speaking, no. Disguising the true nature of a payment is, at best, tax avoidance but more likely just tax evasion since it’s a question of fact whether a payment (or an element of it) is a bonus or not.

I’d be surprised if your employer was willing to take on the variety of risks they’d be exposed to, in order to facilitate you. They’d be exposed to tax risk, and to the risk of you pulling a fast one and coming back looking for your bonus afterwards, since on a nod and a wink you never received a bonus. They’d also be setting a precedent, in the event of future redundancies.

 

[Dave Byrne]

These are fair observations. I suppose my view is the existence and size of the ex Gratia payment and similarly the bonus are the prerogative of the employer. If the Revenue could see this differently then I wouldn't expect the employer to expose themselves and possibly myself.

If it were possible I'd be signing off on it via a confidential redundancy package (so I'd have no comeback).

 

[DB74]

If the bonus is not guaranteed then I don't see how there can be any comeback from Revenue

 

[Gordon Gekko]

Say someone normally gets a €50k bonus and he’s being made redundant with an ex-gratia payment of €60k. If the SCSB permits it, it’d be a pretty unenlightened employer who wouldn’t propose an ex-gratia redundancy payment of €110k.

 

[Setanta12]

If the SCSB permits it, it’d be a pretty unenlightened employer who wouldn’t propose an ex-gratia redundancy payment of €110k.

Usually the lawyers are all over these and they would be loathe to try and organise anything outside of what usually works. I had a situation where I argued the tax-treatment being applied was incorrect - this was before guidance issued on PILON payments - the lawyers agreed with me, but told me 'tough!' that I could argue the point with the Revenue. (I did, and I won my point, substantial refund)

But the lesson was, in these situations they want rid of the employee with minimum fuss - anything outside the Box increases Risk in an area (redundancy) where there are already aggrieved parties.

 

[Gordon Gekko]

My experience is pretty limited in that it tends to be people who are delighted to get redundancy!

 

[misemoi]

All you can do is ask. My previous employer gave me additional days notice to bring me up to a full year of service, saving me 760 EUR, without costing them anything, as they calculated the ex gratia based on my actual service. They didn't have to do this at all, and I was delighted they agreed. Another employer I worked for made a pension contribution for an employee as part of a severance package. Both cases there were plenty lawyers involved and MNC, so not what you could expect. No harm in asking, and if the answer is no, no harm in querying with Revenue as to whether they agree with the tax treatment. It might be worth reminding the company that if you end up paying tax on the bonus, so do they 10.75%.

 

[Gordon Gekko]

My experience has also been with MNCs. It tends to involve informal discussions with senior management which then translate into a written offer. It’s during those discussions where senior management realise what works best for the individual and what doesn’t. That’s what happens in the real world.

 

[torblednam]

My experience has also been with MNCs. It tends to involve informal discussions with senior management which then translate into a written offer. It’s during those discussions where senior management realise what works best for the individual and what doesn’t. That’s what happens in the real world.

Your points are well made, and if the parties are on good terms and the dialogue happens in a timely way it’s perfectly manageable, but in this specific case it seems the ship may have already sailed.

From the OP it appears everything is already signed and sealed, just awaiting the payments being made. The legals will have already happened and there’ll be a paper trail that would make liars of everyone.

 

[dublin67]

If your bonus is treated as a bonus, and not part of your ex-gratia payment, it will be included in your taxable income for the last 36 months for the purpose of calculaitng your SCSB. The SCSB is your average annual salary/earnings for the 36 months prior to termination of employment. If you get your former employer to treat a bonus as part of an ex-gratia payment then good luck to you. It is also in the employer's interest as they will not have to account for employer's PRSI c(. 11%) on the ex-gratia payment as woudl have to do on a bonus.


The comment about picking the 3 highest P60 from the previous ten years is not correct.

 

[Dave Byrne]

Thanks for all the feedback. The point regarding swapping the bonus for a pension contribution is also an interesting approach. To clarify, nothing has been signed. I'll engage with my employer and see how I get on.

 

[Dave Byrne]

So I took some advice from a tax associate in one of the big four and there view was that an employer such as my own would not entertainment novel treatments of a bonus (by adding it to the redundancy ex Gratia or using it as a pension top up) as they feel it may be viewed as facilitating tax avoidance in the view of the revenue and could draw their eye which no employer wants.

In addition, my situation means that a bonus rebranded as a ex Gratia payment would suffer the same tax burden (if I want to retain my tax free partial drawdown of my pension) so it was no longer an option to champion. When I went back to my employer I asked about the pension top up and they said that this had been requested in the past and it wasn't something they would not do (in line with the previous feedback).