Severance Pay Calculation

Severance Pay Calculation

Business, Legislation, Tax

Should you need to obtain a tax directive for a severance payment, or the award of a CCMA / Labour Court settlement, it is important to know how severance pay is calculated and what disclosure needs to be made to SARS in both these cases.

An employer must pay an employee who is dismissed for reasons based on the employer’s operational requirements severance pay equal to at least one week’s remuneration for each completed year of continuous service with that employer, calculated in accordance with section 35 of the BCEA. There are two important elements to take out of this section. Firstly, the severance pay needs to be calculated based on ‘remuneration’ and secondly that the severance pay is on one week’s pay for every completed year of service.

It is important to note that notice pay, leave-pay and any pro-rata bonus is a payment in respect of services rendered and does not form part of the severance package for tax directive purposes. It would be taxed in the payroll in the final month of the employee’s employment.

Should the employer be required to make a payment to an employee in terms of a CCMA or Labour Court settlement the settlement agreement will determine whether the order amount is a payment in respect of services rendered or a severance amount. If an employee is being paid for services rendered, SARS would, via the issued tax directive, instruct the employer to deduct Employees Tax at the marginal tax rate applicable to that employee’s expected annual earnings.

SARS is currently reviewing tax directive applications to ensure that only qualifying severance pay is reflected on the applications. Employers are therefore requested to make full disclosure in terms of the circumstances pertaining to all tax directive requests. SARS has a right of recovery of any tax shortfall from the employer, and with the employee likely to have left their employ, it would be difficult to recover any such shortfall from such ex-employee.

If you would like any assistance with determining the appropriate amount, applying for a tax directive or setting up your payroll correctly please feel free to contact us at [email protected] .