Search This Blog

Tuesday, 16 February 2016

Taxes on severance benefits

Q: I would like to find out if an employee was given the 45 days notice on a redundancy and they took the option of payment In Lieu of notice, would this amount be taxed?

A: According to section 5(6) of the Income Tax Act 1938, as amended,

"... where under a contract of employment the employer is liable to pay an amount by way of severance pay upon the termination of the employment of an employee by reason of the redundancy of the position held by the employee or upon the retirement, or other termination of the employment, by reason of ill-health—

  • (a) so much of the amount as does not exceed three hundred thousand dollars shall be exempt from tax

*Section 5(7) gives a definition of the term:“severance pay” includes any payment in lieu of notice and any payment made in relation to past service of the employee;


  1. Hello,

    I have a question on Job Promotion. I have been employed with a company for over 10 years and have been denied promotional opportunities by my Manager. There has been many instances where my career has been sidelined. Currently their is a senior vacant post where I am very qualified for which is being rotated between two staff members. The Manager has made it clear to me that he does not see me fit for any leadership position despite my experience and qualifications. I must mention I am more qualified than both staff members who are currently given the acting opportunities.I know this is a personal victimization by the Manager. I have written a grievance to HR without any support. In fact they have said to me it is at the discretion of the Manager.

    What are my options to get a fair opportunity just like others? Also how can I move forward if the decisions about my career will always lie in the hands of a Manager who does not want me around.

  2. If my employer asks me to take a salary cut and I agree to this and a new contract is issued and signed, if I am subsequently made redundant months/a year later would my severance owed be calculated against my original or reduced salary?

  3. Can a company pay an employee's severance without the approval of BIR when they have been made redundant? BIR says no, but they are also now saying they have a backlog and cannot give a reasonable timeframe for a response.

    1. Yes companies must apply for Severance Approval from the BIR in keeping with their new Integrated Tax Processing System. If the company does not apply for severance approval then the employee will not be exempt from tax they will have to tax your severance payment or they can be held liable by the BIR.

    2. I usually don't publish nonsense, but I think this needs legal clarity. Section 22(1) of the Retrenchment and Severance Benefit Act is explicit in stating that workers must be paid within 30 days from the date of the last day of notice. That is the LAW. The BIR attempting to amend the law with a new procedure is ultra vires, illegal, null and void and of no legal effect.

      Unless the LAW is amended to reflect whatever new systems the BIR has implemented, it cannot hinder the payment of severance. The BIR cannot create law and therefore cannot hold anybody liable for anything if they are actually in full compliance with the law. If a worker is owing taxes, that's for the BIR to deal with... it is impossible to hold an employer responsible for and employee's non-payment of taxes, unless the Employer failed to remit same, which at the end of the day still does not delay severance payments.

      This is nonsense>>>>>>>>

  4. Good Day,

    Can you tell me if the calculation of severance is based on the person's current salary(in the case when promotions /salary increases were granted yearly) or if it is based on the salary per year?

    Thanks very much.


  5. I was recently made redundant and my severance has been approved by BIR. However, BIR are stating that my outstanding vacation leave must be taxed. I was asked by my company to work my 45 days notice, so I understand why this (the 45 days) must be taxed, but I thought outstanding vacation was tax-free (as confirmed for other employees who were also made redundant, however were not required to work their 45 days).

    1. BIR is being run and operated by a bunch of dunce. That is NOT true! No aspect of your severance below 300k is to be taxed. BIR has no right meddling in severance in the first place. They have given themselves authority... absolute madness.

  6. Good day,

    Under what circumstances would a person who voluntarily resigns, without the threat of retrenchment be entitled to severance? The service period is more than two years in the private sector.
    And would this fall under the Retrenchment and Severance benefits act?

    Thank you.

  7. Good morning!Do the government tax severance for persons over a particular amount?


“Knowledge, like air, is vital to life. Like air, no one should be denied it."