When an individual’s employment is terminated, the terms of payments as they relate to entitlement to tax free payment, are governed by the Employment (Termination and Redundancy Payment) Act.
This guide does not seek to explain how the entitlement works; it will only explain how to calculate the amount that should not be taxed.
The Income Tax (Termination of Employments) Order 1971, determines what should not be taxed when a payment is made.
Payment in lieu of notice, sick pay and vacation pay should not be calculated as a part of the Redundancy amount, but will be part of the Redundancy package. Statutory deductions should be applied to these payments in the normal way, as well as the portion of the redundancy payment that is not exempt.
The formula to be used to calculate the tax-free portion is for example:
2 ¼ x Average Salary for the last 3 Years x number of Years of Service
33 1/3 Years
Salary in Year 10 (June 2006 – May 2007) $1,200,000
Salary in Year 9 (June 2005 – May 2006) $1,000,000
Salary in Year 8 (June 2004 – May 2005) $ 980,000
Average Salary for last 3 Years – $3,180,000 = $1,060,000
Use the formula for the tax-free portion, the amount is:
2 ¼ x $1,060,000 x 10 Years’ Service = $715,500
Total Redundancy payment $1,000,000
Less tax free portion $ 715,500
Taxable amount $ 284,500
Tax payable 284,500 x 25% $ 71,125
Payment to be made to Employee $1,000,000-$71,125 = $928,875
Information gathered from Tax administration of Jamaica
For more information contact Bogle and Company at bogleandcompany.com