Tax relief on lump sum payments: A guide for employers

Some redundancy and retirement payments in Ireland, although not fully exempt from tax, may still qualify for certain types of tax relief. This is especially important for both employees and employers to understand, as it can significantly affect the tax outcome of a redundancy or retirement situation. The Irish tax system provides specific provisions where employers can receive relief on lump sum payments made under particular circumstances.

Lump sum payments eligible for tax relief

Employers in Ireland can claim tax relief on the following types of lump sum payments:

• Wages or salary in lieu of notice: This applies when an employee’s contract ends and instead of working out a notice period, the employer pays them for that time.

• Ex-gratia payments: These are payments made in addition to the statutory redundancy amount. Often referred to as a “golden handshake,” these are discretionary payments given by the employer, and they are eligible for tax relief within certain statutory limits.

It’s important to note that while these payments can qualify for tax relief, they are not always fully tax-free. Specific conditions and limits apply and exceeding those may lead to taxation on the excess amount.

Taxable non-cash benefits

In some cases, employers may provide all or part of a lump sum payment in a non-monetary form, such as a company car, a paid holiday, or other perks. If this happens, the cash equivalent value of those benefits is considered taxable income. This means that even though the employee isn’t receiving cash directly, they may still owe tax based on the market value of the benefit received.

Additionally, if the lump sum is made as part of a contract termination unrelated to retirement or redundancy, the full amount is taxable in the normal way, without the tax relief that might apply to redundancy or retirement situations.

Tax relief for retraining costs

If retraining is part of a redundancy package, some tax relief is available in that context as well. An employer who pays for retraining an employee can provide up to €5,000 tax-free, but this relief is conditional. The following criteria must be met:

• The employee must have at least two years of continuous full-time service.

• The retraining must be completed within six months following the redundancy.

• The purpose of the retraining must be to improve the employee’s skills or knowledge, helping them find new employment or establish a business.

• The employee cannot receive cash instead of the training — they must participate in the retraining programme.

This tax relief applies strictly to the employee and does not extend to their spouse, civil partner, or dependents.

This content may have been developed with the assistance of AI tools. Content is reviewed by a member of the Bright team before publication. Guidance on legislation can be obtained from your industry body.