Revenue has updated the Tax and Duty Manual on Payments on Termination of an Office or Employment or Removal from an Office or Employment. The principal update incorporated was to account for the impact of unpaid leave on the calculation of the taxable amount of any ex-gratia lump sum payment.

The Standard Capital Superannuation Benefit (“SCSB”) is a form of tax relief available in Ireland that can reduce the taxable portion of an ex-gratia termination payment. This relief is particularly relevant for individuals with long service and higher earnings. The SCSB can be claimed where the amount of the relief available under it, exceeds the relief under the basic (and possibly increased) exemption.

The SCSB is calculated based on the average annual remuneration for the last 36 months service to date of termination. The guidance now explicitly confirms that income provided under an employer-sponsored health insurance scheme is considered part of that remuneration as a taxable emolument and should be included in the calculation.

The guidance also clarifies that where an employee has taken unpaid leave during the 36-month period used to calculate average annual taxable emoluments for SCSB purposes, earlier weeks beyond the 36 months may be included in the calculation instead. This adjustment is allowed only if the individual received no taxable emoluments during the unpaid leave period. The guidance includes, for example, if an individual had continued to receive employer pension contributions but no other taxable payments, this period would not qualify as unpaid leave for the purposes of the calculation. Examples of qualifying unpaid leave include unpaid maternity, paternity, or parental leave. This is quite a stringent test and employers should therefore consider the impact of providing taxable emoluments to employees during a period of unpaid leave.

These updates to Revenue’s guidance provide greater clarity in calculating the tax-free portion of ex-gratia termination payments under the SCSB relief. By explicitly including employer-sponsored health insurance and allowing adjustments for periods of genuine unpaid leave, the changes ensure a more accurate reflection of an individual’s remuneration and service history.

If you require further information on this topic or on the taxation of termination payments more generally, please contact a member of the Tax or Employment Groups or your usual Arthur Cox contact.