Severance tax estimator

This estimator works out the tax on a severance payment. For a genuine retrenchment the answer is usually good news: a severance benefit is taxed under the same favourable table as a retirement lump sum, with a lifetime tax-free portion and low rates above it. For a payment on resignation, or under a mutual separation agreement that is not part of a reduction of staff, the answer is different, and often unwelcome, because that money is taxed as ordinary income at your marginal rate. The estimator shows both, so you can see the difference before you sign anything.

It is for employees who have been given a retrenchment package or a settlement offer and want to know what they will actually receive, for people deciding between a retrenchment process and a negotiated exit, and for anyone who has taken a retirement or severance lump sum before and needs to know how much of the tax-free amount is left.

What this calculator works out and who it is for

You enter the lump sum being paid because your employment is ending, the reason it is ending, any retirement-fund or severance lump sums you have taken before, and, if you want them shown separately, the notice pay and leave pay in the same package. The estimator returns the tax-free amount still available to you, the tax on this payment, and what you keep.

Where the reason is a resignation, or a mutual separation outside a reduction of staff, it tells you the payment is taxed as ordinary income, shows what the tax would have been had it qualified as a severance benefit, and explains why that difference is a legitimate thing to raise in the negotiation.

The estimator is for employees. A director or shareholder who holds more than five per cent of the employer's shares is excluded from the severance benefit definition whatever the reason for leaving, and the estimator will overstate the relief in that case.

How the calculation works

A severance benefit is taxed on a cumulative basis. The tax is not worked out on this payment alone; it is worked out on the total of every retirement-fund lump sum and severance benefit you have received since 1 October 2007, and the tax already attributable to the earlier amounts is deducted. The effect is that the tax-free portion is a lifetime allowance, used up once, and that a second lump sum starts in the table where the first one left off.

So the estimator applies the retirement lump-sum table to your earlier lump sums alone, applies it again to the earlier lump sums plus this payment, and takes the difference. That difference is the tax on this payment. The table itself is in four bands. The first R550 000 of cumulative lump sums is taxed at nil. From R550 001 to R770 000 the rate is 18 per cent of the amount above R550 000. From R770 001 to R1 155 000 the tax is R39 600 plus 27 per cent of the amount above R770 000. Above R1 155 000 the tax is R143 550 plus 36 per cent of the amount above R1 155 000.

For a mutual separation or resignation payment the estimator does not try to compute PAYE, because it does not know your other income for the year. It tells you the payment is added to your income and taxed at your marginal rate, and gives the severance figure only as a comparison.

Notice pay and leave pay are kept out of the calculation altogether. Whatever the reason for leaving, those amounts are remuneration and taxed as ordinary income. They are shown on their own line so that you can see what part of the package the favourable table does not touch.

The law behind the numbers

Section 1 of the Income Tax Act 58 of 1962 defines a severance benefit as a lump sum received from an employer in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of a person's office or employment, where one of three things is true: the person has reached the age of 55; the termination is due to sickness, accident, injury or incapacity through infirmity of mind or body; or the termination is due to the employer having ceased to carry on the trade in which the person was employed, or the person having become redundant as a result of a general reduction in personnel or a reduction in personnel of a particular class. The last of these is retrenchment. The definition excludes a person who, at any time, held more than five per cent of the shares or members' interest in the employer company.

A severance benefit is taxed under the retirement lump-sum benefit table in the Second Schedule, cumulatively with retirement-fund lump sums. Because the table applies to the cumulative total of all such benefits since 1 October 2007, the tax-free amount is R550 000 over your lifetime, not per payment. The tax-free amount and the bands were last changed with effect from 1 March 2023, and the 2026 Budget left them unchanged for the 2027 tax year.

The employer must apply to SARS for a tax directive before paying a severance benefit, and must withhold the tax the directive specifies. You are entitled to see the directive, and the IRP5 you receive at year end should reflect the payment under the severance benefit code. If the payment appears as ordinary remuneration instead, the favourable treatment has been lost at source and can only be corrected on assessment.

What matters is the reason the employment ended, not whether the employee agreed to go. A voluntary package offered as part of a genuine general reduction of staff can fit the definition, and SARS has accepted, after submissions from tax practitioners, that the definition draws no line between voluntary and involuntary retrenchment. But a mutual separation agreed because of performance, conduct or a breakdown in the relationship does not fit it: the employment has ended for a reason other than age, incapacity or the employer closing or reducing staff, so the amount is not a severance benefit. It is gross income in the ordinary way, taxed at your marginal rate as part of your income for the year. The same is true of a payment made on resignation. It follows that two employees receiving the same R400 000 can be taxed very differently, one at nil because the money is a genuine severance benefit within the tax-free amount, the other at a marginal rate that could reach 45 per cent.

If your separation genuinely is part of a reduction of staff, ask the employer in writing to apply for the tax directive on that basis. What an employer must not do is describe a separation that is not part of a reduction of staff as a retrenchment on the directive application to secure the lower tax. That is a misrepresentation to SARS, and the taxpayer is the employee.

Worked example

Nomsa is retrenched after fourteen years. Her package is R420 000 of severance pay, R64 000 of notice pay and R22 000 for untaken leave. She has never taken a retirement or severance lump sum before.

The estimator applies the table to her earlier lump sums, which are nil, and to nil plus R420 000. The whole R420 000 falls within the first band, so the tax is nil. She keeps the full R420 000 and has R130 000 of the tax-free amount left for the future. The notice pay and leave pay of R86 000 are taxed as ordinary income through PAYE in the normal way and are shown separately.

Now suppose Nomsa had taken a R300 000 lump sum from a provident fund when she changed jobs in 2015. Her earlier lump sums are R300 000, on which the tax under the table is nil. The cumulative total is now R720 000. Tax on R720 000 is 18 per cent of the R170 000 above R550 000, which is R30 600. The tax on this payment is R30 600 less the nil already attributable to the earlier sum, so R30 600, and she keeps R389 400. The 2015 withdrawal cost her nothing at the time but used up R300 000 of the lifetime allowance, and the bill arrives now.

Finally, suppose there is no reduction of staff at all: the employer and Nomsa have fallen out, and it offers the same R420 000 under a mutual separation agreement. The estimator reports that the amount is taxed as ordinary income. If Nomsa's salary already puts her in the 36 per cent bracket, the tax on the payment is in the region of R150 000, against nil for a genuine severance benefit. That R150 000 gap is the strongest argument she has in the negotiation: the employer can gross up the payment to leave her in the same position. Describing the exit as a retrenchment when no post is being cut is not an option.

What the calculator does not include

It does not compute PAYE on a mutual separation or resignation payment, because that depends on your total income for the year and on the tax tables and rebates that apply to you. It gives the severance comparison instead.

It does not apply the rules for retirement-fund lump sums taken on withdrawal rather than retirement, which use a different and less favourable table. If your earlier lump sum was a withdrawal benefit, its effect on the cumulative calculation is more involved than this estimator models, and the figure for earlier lump sums should be treated as approximate.

It does not deal with the five per cent shareholding exclusion. If you held more than five per cent of the employer, the payment is not a severance benefit regardless of the reason.

It does not deal with the taxation of restraint of trade payments, which can form part of an exit package and have their own rules.

It does not know whether your retrenchment is genuine. The tax treatment follows the facts, and SARS can look behind the label on the directive application.

When to get advice

For a straightforward retrenchment with no earlier lump sums, the estimator and a look at the tax directive are usually enough. Make sure the employer applies for the directive before paying and that the IRP5 codes the payment as a severance benefit.

Get advice if you have taken earlier lump sums and are not sure of the amounts or whether they were retirement or withdrawal benefits; if you are being offered a mutual separation and the tax difference is large enough to change your decision; if the package includes a restraint of trade or a payment described as something other than severance; or if you held shares in the employer. A tax practitioner can request your lump-sum history from SARS, and a labour lawyer can tell you whether a proper retrenchment process is available to you instead of the agreement on the table.

Frequently asked questions

How much of my retrenchment package is tax-free? For a genuine severance benefit the tax-free amount is R550 000, cumulative over your lifetime and shared with retirement-fund lump sums since 1 October 2007. If you have never taken a lump sum, the first R550 000 of your severance pay is tax-free. Notice pay and leave pay are not part of the severance benefit and are taxed as income.

Is a mutual separation payment taxed the same way? Only if the reason qualifies. A voluntary package offered as part of a genuine reduction of staff can be a severance benefit, as can a payment to someone aged 55 or older. A separation over performance, conduct or a breakdown in the relationship is not, and is taxed as ordinary income at your marginal rate.

I took a provident fund payout years ago. Does it matter? Yes. Retirement-fund lump sums and severance benefits share one cumulative table, so an earlier payout uses up part of the lifetime allowance and pushes this payment into a higher band.

Does the employer deduct the tax? Yes. It must apply to SARS for a tax directive and withhold what the directive says. Ask to see the directive and check the IRP5 at year end.

I am 56 and leaving by agreement. Does that count as severance? Termination at 55 or older is within the definition, so a lump sum on leaving at 56 can qualify as a severance benefit even without a retrenchment, provided you did not hold more than five per cent of the employer.

Is my notice pay tax-free too? No. Notice pay, leave pay and any pro-rata bonus are remuneration and taxed as ordinary income through PAYE.

Have the rates changed for 2026? No. The tax-free amount and the bands have applied since 1 March 2023 and the 2026 Budget left them unchanged for the 2027 tax year.