AS IF losing their source of income isn’t bad enough, workers who are made redundant this year could lose a sizeable chunk of their severance package to the new income levy.

Depending on a number of factors, employees who lose their jobs can find that they owe income tax on a portion of their redundancy payment. This has been complicated by the introduction of the income levy.

There are two possible elements to a redundancy package – a statutory payment and an additional ex-gratia payment.

Workers are entitled to statutory redundancy if they have been with their employer for at least two years. It amounts to two weeks’ pay (capped at €600 a week) per year of service, plus a bonus week. Statutory redundancy payments are exempt from income tax and the income levy.

So far, so straightforward. However, conflict arose over the treatment of ex-gratia payments, and, specifically, whether or not an income tax relief known as the Standard Capital Superannuation Benefit (SCSB) could be taken into account for the purposes of calculating the income levy.

Unlike statutory payments, ex-gratia payments are potentially taxable. However, a number of reliefs are available to minimise the amount that is taxable. For example, an individual is entitled to a basic exemption of €10,160 plus €765 for each complete year of service. This can be increased by a further €10,000 (subject to certain conditions). In addition, there is the SCSB relief, which can substantially reduce the amount of redundancy payment liable to income tax, particularly for long-serving employees with high earnings.

Originally, the Revenue’s stance was that SCSB relief couldn’t be taken into account when calculating the income levy due on a redundancy payment. However, the Revenue has since changed its stance and will now allow the same treatment for income levy purposes as applies for income tax purposes. In short, this means that the income levy will be charged after granting any additional relief or deduction for SCSB.

While this reversal is to be welcomed, employees who receive a large redundancy package could still end up paying a levy of up to 3 per cent on the taxable portion – on top of their income tax bill. Given that they may well be facing unemployment, this levy is adding insult to injury.