Top slicing relief on ex gratia payments gone. Tax-free lump-sum not affected

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Brendan Burgess

Brendan Burgess

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Top Slicing Relief will no longer be available from 1 January 2014 in respect of all ex-gratia lump sum payments. Employment
 
So does this mean that there is no such thing as a tax free lump sum anymore, as in for PS workers?
 
Is this effective 1st of january? - I am being made redundant 31st of December and was banking on claiming a few quid via the top slicing scheme - This is horrific for someone out of work with no job and was banking on this money
 
This sounds just awful to me. I was an eircom employee.

Due to ill-health, Cancer, I took early retirement in 2010, got a fortnightly payment, and am due to get my deferred pension, based on over 39 years service next March, 2014.

This would also include a Lump Sum Gratuity based on service, of 3/80 per year of service, so it would be nearly 1.5 times final salary for me, based on 2009 salary.....

This was always a tax-free amount, and was so as my Pension will be 1/80 per year, just short of 1/2 Salary, and no OAP, due to our Public Service PRSI payments, which was pretty basic, covering just Widows Pension, etc.

I am now extremely worried that Tax on this Lump Sum will diminish it considerably, just when it is needed, as my Cancer is ongoing and requires funding privately to continue treatment.

I was relying on this Lump Sum to see me through some tough times ahead.

Is it now no longer Tax Free??

Does anyone know, can't yet find anything on the Revenue web site.
 
I am not sure that this means that all lump sums on retirement will be taxed in full.

I don't think normal lump sums from pensions are ex-gratia. I think you have a right to them.

If they were getting rid of tax relief, they would not be using "top slicing relief"
 
abolishing top slicing relief

HI im just wondering as i was made redundent in march 2103 and was due to claim for top slicing relief in jan 2014 does todays announcement now make that not possible? or does it only come into effect for redundency payments made from todays date?
 
Top slicing relief is the reduction of the income tax paid on the lump sum. It uses the average tax rate over the previous 3 years so you only pay that instead of the marginal rate, which most would have to pay on a lump sum.
 
But will there continue to be the €200k (?) tax-free sum?

I presume that there will.

This changes the taxation of the taxable part.
 
If it's just the top-slicing relief which is changed then there is still a sizable portion of pension payments which can be paid tax-free.

eg - someone with 39 years service can avail of the SCSB tax-free portion

SCSB is calculated as Average Salary over last 3 years x Full Years Service / 15 LESS present value of pension lump sum so take an example where the average salary over last 3 years is €50K and there is no pension lump sum taken:

SCSB = 50,000 x 39 / 15 = 130,000

This €130K is tax free and is in addition to statutory redundancy which for someone with 39 years service would amount to an extra €47,400

So that would give a tax free lump sum of €177,400

Anything over and above this sum would be taxed at your marginal rate (either 20% or 41%)

The top slicing relief would normally have the effect of reducing the 41% tax rate to say 31% so if someone got a redundancy package of €200K, the first €177,400 would be tax free and the tax on the balance would be €7,006 (€22,600 @ 31%) but with the removal of the top slicing relief the tax would now be €9,266 (€22,600 @ 41%)
 
Brendan Burgess said:
I am not sure that this means that all lump sums on retirement will be taxed in full.

I don't think normal lump sums from pensions are ex-gratia. I think you have a right to them.

If they were getting rid of tax relief, they would not be using "top slicing relief"
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Thanks for getting back re this so soon, Brendan, it is much appreciated.

I know it is a very niche concern, but believe me, it is very worrying to see this happening and that feeling of your long awaited lump sum being decimated by the Revenue leaves one with an awful feeling of foreboding and dread, especially when one is relying upon it so directly.

I think you are correct, if it only on ex-gratia lump sum payments we may be spared. It is particularly worrying as it comes in next January, and my official retirement date is on March 1st.

Of course, many will still be caught on the ex-gratia lump sum payment, who can ill-afford to lose money in the current straitened circumstances.

And then any few pounds in savings is to be hit by hugely increased DIRT Tax.

Not very friendly towards Grey Voters, IMO, what with the changes in Medical Card, Telephone Allowance, etc.

This Government may yet regret these measures, when the Grey Voters do go to the Polling Stations, which we know they do.
 
The top slicing relief would normally have the effect of reducing the 41% tax rate to say 31% so if someone got a redundancy package of €200K, the first €177,400 would be tax free and the tax on the balance would be €7,006 (€22,600 @ 31%) but with the removal of the top slicing relief the tax would now be €9,266 (€22,600 @ 41%)
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Sorry but your above calculation is greatly misguided. The taxable element of a redundancy lump sum of €200K is far far greater than €22,600 and therefore the impact of this top slicing abolition is very serious indeed. A €65K redundancy lump sume has a taxable element of €33K as per below info.

Below is taken from citizen information website:

"
Basic Exemption

The basic exemption due is €10,160, plus €765 for each complete year of service. (This does not include statutory redundancy which is tax free.)
Basic Exemption plus Increased Exemption



An additional €10,000 called the Increased Exemption is also available in the following certain circumstances:
  • If you haven't received a tax-free lump sum in the last 10 years and you are not getting a lump sum pension payment now or in the future
If you are in an occupational pension scheme, the Increased Exemption is reduced by any tax-free lump sum from the pension scheme you may be entitled to receive.
Standard Capital Superannuation Benefit (SCSB)

This is an additional relief due that normally benefits those with high earnings and long service. It can be used if the following formula gives an amount greater than either basic exemption or Basic Exemption plus Increased Exemption.
Formula for SCSB: Take the average annual earnings over the previous 3 years (or the whole period of service, if less than 3 years), multiply this figure by the number of years service; divide by 15 and subtract the lump sum superannuation payment received or that may be receivable.


Example: You were made redundant in 2012 after 20 years service and received a lump sum of €65,000 which is your first lump sum. You also got a lump sum of €12,000 from your pension scheme. Your pay for the last 3 years before the date of leaving work was €99,000. The amount of the lump sum which is exempt from tax is the higher of the following 2 calculations:
  1. The Basic Exemption is:
    €10,160 + €15,300 ( €765 x 20 years) = €25,460
    There is no Increased Exemption as the pension scheme lump sum of €12,000 is greater than €10,000
  2. The Standard Capital Superannuation Benefit (SCSB) is:
    €99,000 ÷ 3 x 20 ÷ 15 - €12,000 = €32,000
The taxable amount of your lump sum is therefore €33,000 (€65,000 - €32,000). As the above example shows the SCSB tax relief of €32,000 is a higher amount of tax relief than the Basic and Increased Exemptions of €25,460."
 
Thanks Brendan . But can you clarify if this will affect people claiming for last 3 years or is is starting in 2014 for any ex gratia payments received in 2014?
 
Hi goingforgold

DB74s example assumed a salary of 50k p.a. + 39 years service. The extract u posted assumes 20 years service and a salary of 33k. These variables have a huge impact on the SCSB calculation.

Cheers
 
1dave123 said:
Hi goingforgold

DB74s example assumed a salary of 50k p.a. + 39 years service. The extract u posted assumes 20 years service and a salary of 33k. These variables have a huge impact on the SCSB calculation.

Cheers
Click to expand...

Hi Dave,

I accept that but still doubt that the tax free element would be that much even using SCSB calculation?
 
Oh God, just checked in here again, and this is still very confusing and worrying for me.

Just to reiterate, I had to retire early from my eircom employment in 2010, but I had over 39 year service. I was just 56 then, and I was given my benefits early under an Early Retirement Scheme in effect then.

This consisted of getting an Early Retirement Lump Sum then, and an on-going amount paid fortnightly, basically what my pension payment will be. My Early Retirement Lump Sum was calculated, based on a formula I don't understand now, due to age and my disease leaving me with reduced faculties, under the Top Slicing arrangement, I think, and I avoided paying Tax then on that.

This was not the Lump Sum [Gratuity??] due in the Pension Scheme, at age 60, based on 3/80 per year of service.

This is due to be paid to me in March 2014, just after my 60th Birthday, and when my actual Pension becomes due for payment.

It is a normal PS Superannuation Scheme, a defined benefit scheme, which applies to certain eircom employees who were employed back in the day when we were public servants. It has this Lump Sum arrangement as part of the scheme.

Can anyone verify that this payment is not what Howlin/Noonan are going to tax??

I don't think it can be termed "ex-gratia", as it is integral to the scheme.

Just a simple answer to a complicated question?? I know, not so easy, but perhaps someone has an answer.

Sorry, I'm so worried, what with it being imminent, and my illness, and plans which need to be made and now altered, based on the expectation of that payment.
 
You are talkng about pension lump-sum. Top-slicing relief applies to redundancy lump sums.
 
desperatedan said:
Oh God, just checked in here again, and this is still very confusing and worrying for me.

Just to reiterate, I had to retire early from my eircom employment in 2010, but I had over 39 year service. I was just 56 then, and I was given my benefits early under an Early Retirement Scheme in effect then.

This consisted of getting an Early Retirement Lump Sum then, and an on-going amount paid fortnightly, basically what my pension payment will be. My Early Retirement Lump Sum was calculated, based on a formula I don't understand now, due to age and my disease leaving me with reduced faculties, under the Top Slicing arrangement, I think, and I avoided paying Tax then on that.

This was not the Lump Sum [Gratuity??] due in the Pension Scheme, at age 60, based on 3/80 per year of service.

This is due to be paid to me in March 2014, just after my 60th Birthday, and when my actual Pension becomes due for payment.

It is a normal PS Superannuation Scheme, a defined benefit scheme, which applies to certain eircom employees who were employed back in the day when we were public servants. It has this Lump Sum arrangement as part of the scheme.

Can anyone verify that this payment is not what Howlin/Noonan are going to tax??

I don't think it can be termed "ex-gratia", as it is integral to the scheme.

Just a simple answer to a complicated question?? I know, not so easy, but perhaps someone has an answer.

Sorry, I'm so worried, what with it being imminent, and my illness, and plans which need to be made and now altered, based on the expectation of that payment.
Click to expand...

Top slicing relief has nothing to do with the amount of a lump sum you can receive tax free on retirement. All top slicing relief does (or did) is offer further relief from tax when people received lump sums part of which were not tax free. Unless you were already in that category before today, this change has no bearing on you.
 
Hi desperatedan

I'm no expert but my reading of today's announcement is that it relates to top slicing tax relief only. Top slicing tax relief is a feature of redundancy/severance lump sum payments - not tax free lump sum payments from a Pension Plan

I suspect u will be just fine but lets see what others say.

Cheers
 
Yes todays announcement applies to the tax payable on redundancy pay
ments and has nothing to do with pension lump sums. Hiwever it is not
clear if this change applies to redundancy payments received after
1st jan 2014 only. Can anyone clear thus up
 
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