Tax and SARS knowledge base
Is a SARS directive needed before paying severance?
Must an employer obtain a SARS tax directive before paying retrenchment or severance?
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Direct answer
Yes, for a qualifying severance benefit the employer should apply for an IRP3(a) tax directive before payment and withhold the amount directed by SARS. The employer should not estimate the special lump-sum tax from a public table because SARS accounts for the employee's prior lump sums.
Notice pay, accumulated leave and ordinary salary are not part of the qualifying severance benefit. They are taxed as normal remuneration through payroll.
What this means in practice
Split the exit package correctly before applying. The reason for termination, employee's age or incapacity, operational requirements and ownership interest can affect whether the payment qualifies. An employee holding more than 5% of the shares or members' interest does not qualify for the severance concession under the stated SARS rule.
Step-by-step
- Document the retrenchment reason and package components.
- Separate severance from notice, leave and other remuneration.
- Collect accurate employee and prior-benefit information.
- Submit the IRP3(a) application.
- Apply the directive exactly when processing payment.
- Issue the IRP5 with the correct source codes, including 3901 where applicable.
Documents and records to keep
- Retrenchment notice and agreement.
- Package calculation and payroll split.
- Directive application and SARS directive.
- Payment proof and IRP5.
- Board or management approvals.
Important limits and exceptions
A label in a settlement agreement does not determine the tax result. Resignation payments, restraint payments and damages can require different treatment.
When to get tailored advice
Get advice for executive exits, shareholder-employees, disputed dismissals or packages containing several payment types.