In 2020, about 2.2 million jobs were lost in South Africa and in 2021, that number is expected to double as a result of Covid-19. With that, we have found that there are many questions surrounding the subject of taxes and severance packages. Here’s everything you need to know.
The Basic Conditions of Employment Act states that your severance pay should include at least one week’s worth of remuneration for every full year of work. Your severance package may consist of your notice pay, leave pay, any bonuses that your employer has agreed to pay you according to your contract, severance pay, gratuities (a negotiable payment that is beyond the realms of your contract), as well as any savings in a retirement fund.
With regards to the notice period, you should be paid for at least four weeks’ notice if you have been employed for more than one year. If you are retrenched, you should still be paid your notice period. Of your division package, your severance pay will be taxed like a lump sum in the same way that a retirement fund is taxed.
Here’s how a lump sum of a retirement fund is taxed:
|Taxable income (R)||Rate of tax (R)|
|1 – 500,000||0% of taxable income|
|500,001 – 700,000||18% of taxable income above 500,000|
|700,001 – 1,050,000||36,000 + 27% of taxable income above 700,000|
|1,050,001 and above||1,30,500 + 36% of taxable income above 1,050,000|
It is important to note that everyone is given a once in a life-time tax relief of R500 000 on their retirement lump sums (which includes severance pay as they are taxed in the same way). However, all previous retirement and compensation lump sums must be taken into account when applying the tax tables.
For example, if a taxpayer received a compensation lump sum of R300 000 two years ago, it would have been tax-free as it fell below the R500 000 threshold. If he subsequently received another R350 000 retirement lump sum, R200 000 would be tax-free (i.e R500 000 less the R300 000 he already used towards this limit) and the balance of R150 000 would be taxed at 18% per the above table.
Your employer will need to apply to SARS for a tax directive on your severance benefit. This can be done on eFiling. SARS will then take any previous lumpsums into account (if applicable) in order to calculate the tax which must be paid over to SARS.
Your notice pay, leave pay and any bonuses will form part of your remuneration. This means that these amounts will be taxed according to the regular tax margins.
Here’s an outline of the tax margins for the 2021 tax year:
2021 tax year (1 March 2020 – 28 February 2021) – see changes from last year
|Taxable income (R)||Rates of tax (R)|
|1 – 205 900||18% of taxable income|
|205 901 – 321 600||37 062 + 26% of taxable income above 205 900|
|321 601 – 445 100||67 144 + 31% of taxable income above 321 600|
|445 101 – 584 200||105 429 + 36% of taxable income above 445 100|
|584 201 – 744 800||155 505 + 39% of taxable income above 584 200|
|744 801 – 1 577 300||218 139 + 41% of taxable income above 744 800|
|1 577 301 and above||559 464 + 45% of taxable income above 1 577 300|