Tax on a Retrenchment Package in South Africa (2026/2027)

1. The Short Answer

If you are retrenched in South Africa, the severance part of your package can qualify for special tax treatment. When it does, the first R550,000 is tax-free and the rest is taxed on a sliding scale that tops out at 36%, which is lower than the normal income tax rates most people with large payouts would pay. Your leave pay, notice pay and pro-rata bonus do not get this treatment: they are taxed like a normal salary.

Two things catch people out. First, not every job loss qualifies: SARS has three specific tests. Second, the R550,000 is not a fresh amount each time: it is shared with retirement fund lump sums you have received before, so someone who has already cashed in a pension may get much less tax-free.

2. Who Qualifies for the Severance Concession

SARS calls the payout a severance benefit. You qualify for the lower tax rates only if one of these applies at the time you lose your job:

• You are 55 or older when you are retrenched; or
• You can no longer work permanently because of sickness, an accident, an injury or incapacity through infirmity of mind or body; or
• Your job ends because the employer stopped trading, or because the employer is making a general reduction in staff (the classic retrenchment).

There is one exclusion: you do not qualify if you have at any time held more than 5% of the shares (or member's interest) in the company paying you. This stops owners from paying themselves out at low tax rates.

3. The SARS Table for Severance Benefits

A qualifying severance benefit is taxed on the same table SARS uses for retirement fund lump sums. SARS has kept this table unchanged since 1 March 2023, and it still applies for the 2026/2027 tax year (1 March 2026 to 28 February 2027).

Taxable lump sum	Tax
R0 – R550,000	0%
R550,001 – R770,000	18% of the amount above R550,000
R770,001 – R1,155,000	R39,600 + 27% of the amount above R770,000
R1,155,001 and above	R143,550 + 36% of the amount above R1,155,000

Compare that with normal income tax for 2026/2027, where income above R530,200 is taxed at 36% or more and the top rate is 45%. For a large payout, the difference runs into tens or hundreds of thousands of rand.

4. What Is Not Part of the Severance Benefit

A retrenchment letter usually lists several amounts. Only the severance pay itself goes into the lump sum table. SARS is clear that these are not part of a severance benefit:

• Leave pay for leave days you did not take
• Notice pay (payment in lieu of working your notice period)
• Pro-rata bonuses or a 13th cheque

These are taxed as normal remuneration. Your employer runs them through payroll and deducts PAYE, so they may push your last payslip into a higher bracket for that month. If the PAYE deducted is more than the tax you actually owe for the year, you get the difference back when you file your return.

How much severance pay must you get?

Under the Basic Conditions of Employment Act, an employee retrenched for operational reasons must receive at least one week's pay for each completed year of continuous service. Many employers pay more, and the amount above the minimum is still a severance benefit for tax purposes if you meet the tests in section 2.

5. The R550,000 Is a Lifetime Amount

This is the part most people miss. SARS adds together all the lump sums you have received from retirement funds and severance benefits since 1 October 2007 when it works out the tax on a new one. The tax-free R550,000 is used up by the earlier amounts first.

The method is: SARS calculates the tax on the total of all your lump sums (old plus new) using today's table, then subtracts the tax that today's table would charge on the old ones alone. The difference is the tax on your new payout.

One important exception: withdrawals from the savings pot under the two-pot retirement system are not lump sums for this purpose. They are taxed at your normal marginal rate, so they do not eat into the R550,000. See our two-pot withdrawal guide.

6. Worked Examples

Example A: first lump sum, R700,000 severance

Thandi is retrenched in a company-wide restructure. Her package is R700,000 severance pay plus R40,000 leave pay. She has never taken a lump sum from a retirement fund.

• Severance: the first R550,000 is tax-free. The next R150,000 is taxed at 18% = R27,000.
• Leave pay: the R40,000 goes through payroll and is taxed at her marginal rate with the rest of her salary for the year.

Her effective tax rate on the severance is under 4%.

Example B: same payout, but an earlier pension cash-out

Sipho gets the same R700,000 severance. Ten years ago he resigned and took R200,000 from his pension fund in cash.

• Total lump sums: R200,000 + R700,000 = R900,000.
• Tax on R900,000 on today's table: R39,600 + 27% × R130,000 = R74,700.
• Tax on the earlier R200,000 on today's table: R0.
• Tax on Sipho's severance: R74,700 − R0 = R74,700.

Same payout, nearly three times the tax, because the earlier R200,000 had already used part of his tax-free amount. SARS runs the exact figures when it issues the tax directive.

Example C: does not qualify

Lerato is 40 and is asked to leave in a one-person "separation agreement" with no wider staff reduction. Her R300,000 payment does not meet the severance tests, so it is taxed as normal income. If her salary already puts her in the 36% bracket, she pays at least R108,000 on it (more once it pushes her into the 39% and 41% brackets), compared with R0 if it had qualified.

7. Your Pension or Provident Fund After Retrenchment

Your retirement fund is separate from the severance package. Since the two-pot system started on 1 September 2024, your fund is split into up to three parts, and each has its own rules when you leave a job:

• Retirement component (two-thirds of contributions since 1 September 2024): you cannot take this in cash when you are retrenched or resign. It stays invested until retirement.
• Savings component (one-third of contributions, plus seed capital): you can withdraw from this once per tax year, taxed at your marginal rate.
• Vested component (money saved before 1 September 2024): the old rules still apply, so you can usually take this in cash, or transfer it to a preservation fund.

Which tax table applies to a cash withdrawal from the vested component depends on your age and why you left. Before deciding, ask your fund for a quote that shows the tax. A cash withdrawal uses up part of your lifetime lump sum allowance, which can mean more tax on your retirement lump sum later. Transferring to a preservation fund keeps the money invested with no tax now.

Use our retirement calculator to see what cashing out today does to your savings at 65.

8. The Tax Directive and Your Tax Return

Your employer cannot just guess the tax on a severance benefit. Before paying you, it must apply to SARS for a tax directive on an IRP3(a) form. SARS looks at your history of lump sums, works out the tax, and tells the employer how much to withhold. You receive the net amount.

The payout then appears on your IRP5 for that tax year, and you must include it when you file your annual return on eFiling. Because SARS already knows about earlier lump sums, the directive normally gets the tax right, but check the IRP5 carefully: if the employer coded the payment wrongly, your assessment will be wrong too.

Claim UIF as well

Being retrenched also usually qualifies you for unemployment benefits from UIF. UIF benefits are not taxable. Our UIF guide explains how to claim and how much you can expect, and the UIF calculator estimates your payout.

9. A Checklist Before You Sign

1. Ask how the payment is described. The retrenchment letter should say the termination is because of a general reduction in staff or the employer stopping trading. That wording matters for the tax test.
2. Get the amounts split out. Severance pay, leave pay, notice pay and bonus should be listed separately, because only severance pay gets the concession.
3. Check your earlier lump sums. Look up any pension or provident fund withdrawals you have taken since October 2007; they reduce your tax-free amount.
4. Ask for the directive figure before the payment date, so you know your net amount.
5. Do not rush the pension decision. The severance payout and your retirement fund are separate. You can preserve the fund even if you take the severance in cash.
6. Register for UIF soon after your last day of work.

Frequently Asked Questions

Sources

Every figure on this page was checked against these official sources on 19 October 2026:

• SARS: Tax and retrenchment
• SARS: Retirement lump sum benefits tables
• SARS: Rates of tax for individuals (2027 tax year)
• SARS: Budget 2026 frequently asked questions
• SARS: Two-pot retirement system and tax directives