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Is a restraint-of-trade payment taxable?
Is a restraint-of-trade payment taxable?
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Direct answer
Yes. SARS says a restraint-of-trade payment to a natural person is remuneration where it relates to employment, office holding, or past or future employment or office holding. The payment is reflected under code 3613 on the IRP5 or IT3(a).
The tax treatment does not decide whether the restraint agreement is enforceable. That is a separate contractual question.
What this means in practice
A restraint-of-trade payment is commonly made when an employee leaves, changes role or agrees not to compete for a period. The fact that it is paid separately from normal salary does not make it tax-free. SARS includes a qualifying restraint payment in remuneration for employees' tax purposes.
The practical record trail matters. The agreement should identify the restraint, the parties, the amount and the payment date. The payslip or payroll record should show the payment and PAYE. At year end, the IRP5 or IT3(a) should reflect the payment under the relevant source code.
Keep the documents together even where the payment was made after your final ordinary salary. A later payment can still relate to past or future employment. Clear records make it easier to establish what the payment was for and whether the certificate accurately reports it. This is especially useful where the termination paperwork refers to more than one payment.
Do not try to fix a certificate problem by changing a prepopulated ITR12 entry. If the agreement, payment record and certificate do not agree, ask the employer to investigate and correct the source data it submitted to SARS.
Step-by-step
- Keep the signed restraint agreement.
Retain the clause or agreement that explains why the payment was made, the amount, payment date and any repayment or other condition.
- Check the payslip or payment record.
Confirm that the payment and PAYE deduction are visible. If the amount is paid after employment ended, keep the record with the termination documents.
- Review the IRP5 or IT3(a).
SARS's employer guide identifies code 3613 for restraint-of-trade payments. Compare the certificate with the agreement and payroll record.
- Ask the employer about a mismatch.
Give payroll the tax year, payment date and certificate details. Ask it to correct any inaccurate certificate information rather than attempting to recode it yourself.
- Check the ITR12 before submitting.
Compare the prepopulated certificate entry with the IRP5. Keep the agreement and correction correspondence if the payment may later be queried.
Documents and records to keep
- Restraint-of-trade agreement and amendments.
- Payslip, payment advice or bank record.
- IRP5 or IT3(a) certificate.
- Termination records, where relevant.
- Payroll correspondence and any corrected certificate.
- ITR12 and assessment notice after filing.
Important limits and exceptions
This article does not provide a tax rate or calculate the final tax on a payment. PAYE on the payment and the annual assessment are different stages of the process.
It also does not decide whether a restraint is valid, how long it can last, or whether a repayment clause can be enforced. Those are legal and contractual questions outside the PAYE classification.
Do not assume that every termination payment is a restraint payment. The agreement and payment description must support the specific treatment.
When to get tailored advice
Get tailored advice if the payment is combined with severance, notice, leave, settlement or a repayment obligation, if the certificate does not show code 3613, or if the employer cannot explain the PAYE deduction.
TaxProof can help organise the agreement, payroll records and IRP5 for a tax-record review. The employer corrects certificate data and SARS determines the final assessment.
Related TaxProof guides
- Employer IRP5 and EMP501 guide
- How is a severance benefit taxed when I am retrenched? (B03-IND-002)