Tax and SARS knowledge base
How is a severance benefit taxed when I am retrenched?
How is a severance benefit taxed when I am retrenched?
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Direct answer
For retrenchment, retirement or death, SARS says the employer must obtain a tax directive. SARS determines the applicable exemption when it processes the directive application. The related lump sum is reflected under code 3901 on the IRP5 or IT3(a).
Do not assume every payment made when a job ends is a severance benefit. Notice pay and leave pay have separate treatment.
What this means in practice
The directive process is important because it is how SARS determines the employees' tax to withhold from the relevant lump sum. The employer, not the employee, applies for the directive. The employee should receive or request the documents needed to check the payment.
The supporting records should identify the reason for termination, the payment breakdown, the directive outcome and the certificate information. A retrenchment payment may be accompanied by other amounts. Those other amounts should not automatically be added to the severance-benefit amount just because they were paid at the same time.
The directive is not an optional document to reconstruct after filing. It is part of the employer's withholding process for the qualifying lump sum. Ask for a copy or the directive reference early, then retain it with your certificate and termination letter. It helps distinguish the severance-benefit amount from other employment amounts on the final payroll.
The ITR12 should be checked against the directive and IRP5. If the code, directive information or payment amount is wrong, ask the employer or fund to correct its submission. Do not alter a prepopulated certificate entry as a substitute for a source correction.
Step-by-step
- Obtain the termination documents.
Keep the retrenchment letter, settlement or payment breakdown and any communication explaining the payment components.
- Ask for the SARS directive.
The employer should have obtained a directive for a retrenchment severance benefit. Keep the directive with the payment records.
- Review the certificate.
Check the IRP5 or IT3(a) for the severance-payment information, including code 3901. Compare it to the directive and payment breakdown.
- Check other termination amounts separately.
Identify notice pay, leave pay and other amounts rather than assuming that they share the severance treatment. Ask payroll to explain each component.
- Review the ITR12 before filing.
Compare the prepopulated entry with the certificate. Keep the directive and corrected records if the employer updates its submission.
- Retain the assessment.
Keep the ITR12 submission confirmation and ITA34 assessment. These are useful if SARS asks for evidence or if you need to check a discrepancy.
Documents and records to keep
- Retrenchment letter or termination agreement.
- SARS tax directive.
- Payment breakdown and payslip.
- IRP5 or IT3(a).
- Employer correction correspondence.
- ITR12 and ITA34 assessment.
Important limits and exceptions
This guide does not calculate the exemption, tax rate or final tax result. SARS determines the applicable exemption through the directive process using the relevant facts.
Notice pay and leave pay can have separate directive and PAYE treatment. Do not call them severance benefits without checking the actual payment description and SARS process.
This article also does not decide whether a retrenchment is legally valid or whether a settlement agreement is enforceable.
When to get tailored advice
Get tailored advice if a payment includes several components, the directive is missing, the IRP5 does not match the payment letter, or the amount is material. Help is particularly useful where retirement, illness, settlement or a prior lump sum is involved.
TaxProof can help organise the termination documents and identify discrepancies for the employer or SARS. SARS determines the directive outcome and the final assessment.
Related TaxProof guides
- How to object to a SARS assessment
- Is notice pay taxable when I leave my job? (B03-IND-003)