FINANCIAL FORUM
Q&A: How does tax-free severance pay work?
The severance benefit is taxed according to the retirement fund lump sum and severance benefit table in the Income Tax Act
Q: In the BusinessLIVE article “Be aware of tax you’ll pay on a severance package (https://www.businesslive.co.za/bt/money/2020-04-26-be-aware-of-tax-youll-pay-on-severance-package/)” published on April 26 there is reference to the first R500,000 of severance benefits paid on retrenchment being tax free. But how does this work in practice? Will my employer apply normal tax to the notice pay, severance pay and leave pay, or will it apply to the R500,000? Is the tax-free amount only applied when you are assessed? I do not know how long I will be out of work, but I expect to be without an income for at least some time. Will this not reduce my tax? Would it be better to keep the R500,000 tax free for any retirement benefits I need to access should I need to before I find work? And if I don’t need it, to use it when I reach retirement rather than use it on the severance benefits? — Anon via e-mail
A: Jenny Gordon, head of technical advice for investments, product and enablement at ...
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