As the jobs market deteriorates further, it pays to know your payment rights if the worst happens and you are laid off, writes Fiona Reddan
DESPITE AN upturn in predictions for the Irish economy, unemployment levels are nonetheless expected to continue to rise this year, as companies struggle to survive in what remains a tough environment.
For employees, this means that the spectre of redundancy remains omnipresent, with those working in financial services in particular expecting another wave of lay-offs this year. If you are fearful for what the future might hold, you need to take the time to figure out what kind of a payment you might be entitled to.
If you have recently been made redundant or are facing the imminent loss of your job, it’s time to get up to speed on how to ensure that you get the most tax-efficient redundancy package.
How do I qualify for redundancy payments?
Not all employees are eligible for statutory redundancy, with employees who have recently joined a firm likely to lose out. The rule is that you must have at least two years of continuous service with your current employer to qualify. Absences such as maternity leave, carer’s leave or illness do not break your length of service.
Another condition, says Sarah Connellan, a tax director with Deloitte, is that your position must also be made redundant, as to qualify for payment you can’t just be dismissed.
While most people may be aware of the above, the other main requirement of statutory redundancy is that unless you work part-time, you must also be paying Class A PRSI.
The majority of workers will pay Class A PRSI, as it applies to all people in industrial, commercial and service type employment. It also includes civil and public servants recruited since 1995, employed under a contract of service with a reckonable pay of €38 or more a week from employment.
But for certain public servants employed before 1995, as well as commissioned Army officers, judges or state solicitors, only a limited number of social insurance payments are covered and it doesn’t include redundancy. If this is the case, the employee won’t be entitled to a statutory payment. The main impact of this is to increase the tax you are likely to pay on your redundancy lump sum.
How much might I receive?
If you meet the above requirements, you can expect to receive at least a statutory redundancy payment, which is a lump-sum payment based on your pay.
All eligible employees are entitled to two weeks pay for every year of service over the age of 16 plus one further week’s pay, subject to a maximum earnings limit of €600 a week. So, someone earning €850 a week with 10 years of service can expect to get a sum of €12,600. On top of this, you may also receive an ex-gratia payment at the discretion of your employer. The amount of this sum tends to differ from firm to firm.
For example, Anglo Irish Bank is offering its employees four weeks pay for each year of service, to a maximum of 52 weeks pay in its current redundancy programme, while workers at the Limerick operation of computer firm Dell received six weeks pay for each year of service to a maximum of 104 weeks. These amounts are normally inclusive of the statutory requirement.
If you want to calculate how much statutory redundancy you might be entitled to, there is a calculator on www.citizensinformation.ie
What tax reliefs am I entitled to?
According to Connellan, there are two parts to a redundancy payment. The first, the statutory redundancy payment, is tax-free. However, tax may be payable on any additional ex-gratia payments, subject to certain reliefs.
To calculate your taxable amount, you can apply the higher of the basic exemption, the increased exemption or the standard capital superannuation benefit (SCSB).
The basic exemption exempts payments over and above statutory redundancy up to €10,160, plus €765 for each complete year of service, from tax. So, someone who receives an ex-gratia payment of €15,000 for 10 years service, will not have to pay any tax.
The second, known as the “increased exemption”, is also available in certain circumstances and is worth an additional €10,000. Connellan says you can avail of this if you haven’t availed of a tax-free lump-sum in the past 10 years. Given the buoyant jobs market up until now, she says that most people should be eligible for this exemption.
However, if you are in an occupational pension scheme and you take this exemption, the tax-free lump sum from the pension scheme which you may be entitled to receive upon retirement will be reduced by this amount.
As Revenue approval is required for the increased exemption, Connellan urges employees who either are being made redundant, or have been, to check whether they received this deduction, if eligible, as not all employers will withhold the tax.
“It’s important for an individual with three, four or five years service with a company to make sure that the company has applied for it [the exemption]. If not, they can do so themselves afterwards and get a refund from the Revenue,” she says.
The final relief available – the standard capital superannuation benefit – is most suited for those with high earnings and long service as it is based on average annual earnings and the number of years of service. It is a relief given for each year of service equal to one-15th of the average annual pay for the last three years of service less any tax-free lump sum entitlement from the pension scheme.
It had been rumoured that the Government would cap the tax free amount available under this relief at €200,000 in the last budget, but, in the event, it didn’t follow through with it.
What tax must I then pay?
Having applied the above exemptions as relevant, you may then be left with an additional sum which is liable to tax. While you won’t have to pay PRSI on this amount, you will unfortunately have to bear the brunt of the health and income levies.
This means that the tax rate levied on the balance of your lump-sum payment could be as high as 52 per cent.
When it comes to this, you have two options – it can either be taxed as part of your current year’s income, or, at your average rate of tax in the previous three years. This latter option is known as “top slicing relief”.
If you normally pay tax at the standard rate, but your lump-sum pushes you into the higher tax bracket, you may be advised to avail of top slicing relief, as it should push down the amount of tax you are liable for.
For example, if you were made redundant in 2008 and the taxable amount of your lump sum was €20,000, it may be taxed at your higher 41 per cent income tax rate, depending on your income for the year.
This would mean a tax charge of €8,200. However, if your average rate of tax for the previous three tax years was 31.6 per cent, top slicing relief would bring this charge down to €6,200.
You should bear in mind that employers will not avail of top slicing relief on your behalf. It will be up to you to claim the relief if you believe it is advantageous to you.
For more details on how redundancy payments are taxed, look for the Revenue Commissioners’ detailed leaflet on the subject.
Can I claim any tax back?
Depending on when you were made redundant, you may be entitled to a refund on either the income levy you have paid or income tax. As Connellan says, it is best practice for employers to apply the highest exemptions possible to employees, ensuring that they come away with the highest amount. Nevertheless, there may be a case for individuals to review their own tax positions when it comes to redundancy.
For example, if you are made redundant early in the year and don’t earn any more income for the rest of the year, you may be eligible for a refund on tax paid. You can apply for an interim refund by submitting a form P50 to the Revenue, says Connellan. Similarly, you may be due a year-end refund on part of the income levy paid.
Moreover, if you paid the higher rate of tax on the taxable amount of your lump-sum, you may apply for top slicing relief at the end of the year. And, as previously mentioned, the employer may not apply for an increased exemption on your behalf, so this is something else you should consider. You have four years from the end of the year in which the lump sum payment is treated as income to claim any tax reliefs due.
What happens if my employer is insolvent?
If you have been made redundant because your employer is insolvent and is unable to meet its statutory redundancy obligations, the Department of Enterprise, Trade and Employment will step in and fund payments directly from the Social Insurance Fund.
If your firm’s pension fund is also in deficit, it may be eligible to avail of the new Pension Insolvency Payment Scheme (PIPS). Established as of the start of this week, this scheme enables trustees of pension funds to link up with the Government to provide cheaper annuities, thereby keeping more assets within the fund for plan members.
What should I do with my lump sum?
Before you even consider what you should be doing with your lump sum, you need to transfer it out of your current account – where it may already have started to diminish – to a decent paying variable rate account. At least this way it will stay intact and will be earning something for you while you make your decisions.
Nationwide (UK), for example, offers 3.3 per cent on its easy access account, while Halifax has a rate of 3.75 per cent on its Flexi Saver account, although it only applies to the first €10,000. Then you need to consider if you can put the money away for a certain time period, can you invest it or will you need to have access to it?
For Simon Shirley of Simon Shirley Advisers, staying flexible is critical, given that it may take some time before you find a new job. “Retaining a lump of cash is critical, you don’t know how long you’ll be unemployed for,” he says.
While paying down your mortgage may be attractive as it gives you an element of peace of mind – particularly if you are on a variable rate given the upward pressure on rates – it will reduce your future flexibility and your pool of available cash.
“If you get a lump-sum of €50,000, your inclination might be to knock €50,000 off your mortgage, but having a cash reserve is critical,” says Shirley, adding that if you were to pay down your mortgage now, you may actually end up in arrears in a year or so if you are unable to find a new position and still have no income. “Once you give it to the bank, you’re not going to get it back.”
He says you may be better to negotiate a revised repayment facility with your lender until such a time as you are in employment again. Moreover, you may be receiving some element of tax relief on your mortgage in the form of mortgage interest relief.
If there is any debt you should consider paying down, it is of the short-term, expensive type. So, if you have significant credit card debt or personal loans, you might want to consider paying off these first. You may only be making 3 per cent on your money in a deposit account compared to paying upwards of 10 per cent on outstanding personal debt. You should pay down the most expensive debt first.
However, again, you should bear in mind that in this uncertain economic environment, when it may take considerable time to find a new job, you can’t underestimate the value of having cash in the bank. If you are meeting your debt payments and aren’t in fear of getting into arrears, it may be best to simply continue meeting minimum repayments, at least until you get another job sorted.
Depending on your own circumstances, you may find that you end up leaving your lump sum in that easy access high yielding deposit account. If you have no mortgage, a decent pension and are near retirement age, you may be in a position to invest some or all or your lump sum, with a long-term horizon.
If not, however, you may be best to keep your options open and keep your money easily accessible. In such circumstances, Shirley advises you to stay away from the stock market.
Finally, if you’re thinking about using your lump sum to set up your own company, there is a corporation tax exemption for start-up companies. Provided that your start-up does not have a tax liability in excess of €40,000 in the year, it will be exempt from both corporation tax and capital gains tax in each of the first three years.
What about my other employment benefits?
Your annual salary is not the only thing you lose when you lose your job. Life assurance, disability allowance and health insurance often come as part of your work contract, so you may need to consider replacing some of these.
While income protection may obviously be unnecessary, life assurance may still be a consideration. “It’s important to replace death-in-service cover if you have dependants,” says Shirley, adding that you will need protection in addition to mortgage cover.
Given that waiting periods apply if you decide to let your private health insurance cover lapse, you may want to hold on to this, at least to some degree. One option might be to downgrade your cover, at least in the short term. If two adults give up Quinn Health’s Healthmanager for example, in favour of the firm’s Essential Plus (Excess) policy, €944 could be saved a year.
