Professional Accountants | Secundes

It’s not only your retirement fund that may pay out when you decide to call it a day.

Some time ago I wrote a series of articles dealing with the various payments that an employee might receive when leaving an employer.

However, while those articles dealt mostly with what went wrong between the former employer and SARS, this article covers the employee tax treatment of lump sum amounts that are paid by an employer upon termination of employment. While the list is not exhaustive, these are the typical payments that would be over and above those that one may receive from any retirement fund of which one may be a member.

Leave pay

Apart from people who work in a factory environment that has an annual shutdown, very few take all of their annual leave entitlement in one go.  Add to this the fact that it is illegal in terms of South African labour legislation to commute leave days for cash other than on termination of employment, and it is perhaps unsurprising that many employees receive a welcome windfall when leaving their current employer.

Unfortunately, SARS is ever-present with its hand outstretched for its share—because, like virtually all receipts connected with employment, leave pay is taxable.

The PAYE calculation is simple for the payroll department (and expensive for you): leave pay is treated as ordinary income which is simply added to your salary for that month.

Tax is paid according to the normal income scales, which means that such payments are effectively taxed at your marginal rate unless the amount pushes you up into the next bracket.

The best way to get around this tax problem (assuming that you don’t need the money, i.e. you have other income sources) is to negotiate with your employer to take the time off in lieu of notice. Many employers are quite amenable to this (unless, of course, there are aggravating circumstances that have led to the termination of your employment).

Retrenchment gratuities

Many employers provide for a retrenchment gratuity based on years of service and multiples of earnings at the time of retrenchment. Such gratuities are taxed at preferential rates according to those applicable to retirement fund lump sum benefits payable upon retirement.

However, it is important to note that the tables (including the R550 000 that is tax-free) are not only lifetime limits, which means that previous lump sums will be taken into account when determining the tax payable but will also impact the tax on any future retirement or severance benefits that you may receive in future.

Employers and employees are often under the impression that accumulated leave pay can be bundled in with the gratuity to access the preferential tax rates.

This is not the case—leave pay needs to be treated separately and taxed as normal income. I speak from experience with a client who was retrenched about three years ago—this is something that SARS checks when issuing a tax deduction directive!

Long service awards

Any award made to recognise long service is tax-exempt provided that all of the following conditions are met:

The award is not paid in cash, i.e. it must be in the form of a gift or an award. Gift vouchers or cards preloaded with a specific value are regarded as cash in this case;

The value of the award does not exceed R5 000; and

The award must be made for uninterrupted service for an initial period of 15 years and subsequent periods of ten years.

Any gift value exceeding R5 000, as well as any cash award, is fully taxable.


Steven Jones is a registered SARS tax practitioner, a practising member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks.

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.

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