Termination and Redundancy Payments and lump sum payment

Posted on January 28, 2015 Updated on January 28, 2015

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

Total                                                               $3,180,000

Average Salary for last 3 Years   –                  $3,180,000 = $1,060,000

                      3

Use the formula for the tax-free portion, the amount is:

2 ¼ x $1,060,000 x 10 Years’ Service      =      $715,500

33 1/3

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