Can directors get tax-free severance pay?

[elacsaplau]

Hi all,

I have a few queries regarding extracting money from a company. I know that specialist tax advice will be required but at a high level:

1. Can directors qualify for statutory severance?

2. Can directors qualify for non-statutory severance?

 

[RedOnion]

1. Can directors qualify for statutory severance?

It depends on PRSI class they are paying. They must be in insurable employment, so Class S does not count. (As in the company cannot reclaim).

2. Can directors qualify for non-statutory severance?

Yes. They can normally get relief on lump sum payment in the same manner as other employees.
https://www.revenue.ie/en/personal-tax-credits-reliefs-and-exemptions/lump-sum-payments/index.aspx

Definitely worth getting specialist advice on.

 

[elacsaplau]

Thanks for taking the time to reply, RedOnion

I'm trying to help a pal so I'm just trying to give him some high-level pointers before he talks to a tax guy.

Regarding the statutory part, my understanding is that the Rebate has been abolished for a few years. I have been googling but I just can't see where directors are prohibited from getting statutory redundancy (and importantly the personal tax consequences of this.)

In relation to the non-statutory element (sorry for being a pain!) but what does "normally" mean - i.e. are there specific criteria that disqualifies a director from receiving a non-statutory payment that do not apply to regular employees?

 

[RedOnion]

but I just can't see where directors are prohibited from getting statutory redundancy (and importantly the personal tax consequences of this.)

You're trying to maximise the tax free amount. My understanding is it doesn't matter whether it's classed as statutory or non-statutory for the person - there's an overall limit. There is a difference to the treatments within the company.

You won't find an exclusion for directors. The definition of 'eligible employee' includes that they must be in insurable employment, which is defined by PRSI class.

In relation to the non-statutory element (sorry for being a pain!) but what does "normally" mean

Me being pedantic! This isn't my area, but i have an interest in minimising my own tax liability.
The only scenario I've seen so far that causes a complication is where a director hasn't been taking a salary from the company. If you're a director taking a PAYE salary, I'm not aware of any scenario where you can't get the full benefit.

 

[elacsaplau]

Thanks again, RedOnion

In relation to the classification not mattering, I respectfully disagree!!

My understanding (yeah, ok) is that statutory is always tax free and that severance in addition to statutory is tax relievable depending on the extent of whichever of the three bases applies as per your original link. Also, the €200k limit excludes statutory.

We seem to be saying/agreeing that directors can get non-statutory. Are we saying that they can get statutory or is that still unclear?! Or is it time for me to make myself a strong Sunday morning coffee?

 

[RedOnion]

In relation to the classification not mattering, I respectfully disagree!

Apologies, you are indeed correct.

Are we saying that they can get statutory or is that still unclear?

According to welfare rules it's purely down to PRSI class. I don't think you could use a different definition for Revenue purposes.

 

[srase]

Section 7 of the Redundancy Act 1967 sets out the criteria for qualifying for statutory redundancy. It states the employee must have been an "employed contributor". If a Director is on PRSI class S they are not an employed contributor. http://www.irishstatutebook.ie/eli/1967/act/21/section/7/enacted/en/html#sec7

 

[dublin67]

A director can get a severance payment on identical terms to an employee. The tax exempt portion of it is calculated in standard way - the higher of basic exemption, increased exemption and SCSB may be claimed.

A director paying a class S PRSI contribution is not entitled to statutory redundancy (as mentioned above). A director paying a full standard Class A contribution is entitled to statutory redundancy.

 

[Mary55555]

Hello,

Just to throw my 2 cent in!!

I agree that anyone can use the ex gratia tax relief (ie, the basic, the increased and the scsb), subject to lifetime limits..

I also agree that statutory redundancy payments are tax free. These are only payable to Class A emoluments. There is no rebate from the department of Enterprise, although they do have hand calculator..

That being said in order to gualify for the statutory payment there most be a genuine redundancy.. whereas for the ex gratia tax reliefs you have to cease to be an employee rather than the role ceasing to be/ a genuine redundancy..

 

[MFeely]

Hi
A director paying class S prsi that gets a severance payment as he work no longer for company
Must he resign as a director to get the severance pay?
Thanks