Q&A: My retrenchment pay was heavily taxed — is that because I withdrew from a fund before?

Q: I was retrenched and received a payout from the company but it was heavily taxed, which I think is very unfair. Did the company make a mistake? I did cash in my retirement savings previously, so did that have anything to do with it? — Jane May via e-mail

A: Jenny Gordon, head of legal services at Alexander Forbes, replies:

In the Income Tax Act, a cash amount paid by an employer on retrenchment is taxed as a severance benefit and based on a special tax table and not on the normal tax tables which are released annually. The same special tax table applies to cash lump sums withdrawn from retirement funds on retrenchment, retirement and on death before retirement. That is, the first table below — R500,000 is taxed at 0% and the remainder is taxed on the tiers of the table. The maximum rate is 36%, which is reached on lump sums over R1,050,000, aggregated over a lifetime.

In addition, any cash lump sum received from a retirement fund on withdrawal before retirement is also aggregated with all severance benefits and lump sums received on retirement or retrenchment. Withdrawal benefits are taxed on the second table below. The amount taxed at 0% is only R25,000.

Therefore, if you have previously withdrawn from a retirement fund and/or received a severance benefit, each will be added to what you currently receive as a severance benefit, and the amount will be taxed on the tier of the applicable table of the aggregated amount.

For example: You withdrew R300,000 from your retirement fund when you resigned from your previous employment in 2015. In 2018, you are retrenched and receive R1m as a severance benefit. In 2020, you retire and take R500,000 in cash from your retirement fund. Your tax will be calculated as follows:

2015 — R300,000 taxed on the withdrawal table.

2018 — R1m severance/retirement table. However, your previous withdrawal is aggregated, so you will start the retirement table at R300,000, which means that of the R1m only R200,000 will be taxed at 0%; R200,000 will be taxed at 18%; R350,000 at 27% and R250,000 at 36%.

2020 — R500,000 severance/retirement table. You have previously had an aggregated amount of R1.3m taxed, so all further amounts will be taxed at 36%.

In summary, the table does not apply annually. It applies cumulatively to all lump sum benefits paid from retirement funds on retirement or retrenchment as well as to severance benefits received over a lifetime. In addition, any cash benefits received from a retirement fund on withdrawal before retirement must be aggregated with all severance benefits and lump sums paid from retirement funds on retrenchment, retirement or death.