Retrenched? How a Severance Package Is Actually Taxed — and Why R550,000 Is Not a Fresh Start
The letter arrives, the numbers are discussed, and somewhere in the conversation somebody says the first R550,000 is tax free. People plan around that sentence. Then the money lands and it is materially less than expected.
Two things explain almost every version of that shock. The R550,000 band is a lifetime allowance rather than a fresh one, and most of what a retrenchment package contains is not a severance benefit at all.
Both are worth understanding before you agree to anything, because the structure of a package sometimes has more room in it than the total does. The band is shared with your pension and other retirement lump sums, which is where most of the confusion starts. This is the tax side; the rights side — notice, consultation, what you are owed — is covered separately in our guide to retrenchment and severance rights.
The table that applies
A qualifying severance benefit is not taxed like a salary. It is taxed on the same table used for retirement fund lump sum benefits, which is considerably kinder at the bottom:
| Amount | Tax |
|---|---|
| R1 – 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 |
SARS confirms this table applies for the 2025, 2026 and 2027 tax years without change.
What counts as a severance benefit is defined narrowly. In SARS's words, severance benefits "consist of lump sums from or by arrangement with an employer due to relinquishment, termination, loss, repudiation, cancellation or variation of a person's office or employment."
Note what that describes: the lump sum paid because the employment ended. Not everything else in the envelope.
The band is cumulative, and that is the trap
Here is the provision that surprises people, and it is stated plainly by SARS: each new lump sum is taxed against all prior lump sums received, using the marginal rate method.
The R550,000 at 0% is therefore a lifetime cumulative band shared across retirement fund lump sums and severance benefits. It is not renewed by a new job, a new employer, or the passage of time. If you have drawn on it before, you have less of it now — and you usually discover that only when the tax directive comes back.
The arithmetic makes the point better than description does. Take an identical R700,000 severance benefit:
- No previous lump sum. Only R150,000 falls above R550,000, taxed at 18% — R27,000.
- R300,000 taken previously. The cumulative total is R1,000,000, which attracts R39,600 + 27% of R230,000 = R101,700. Nothing was payable on the earlier R300,000, so the whole R101,700 falls on this payment.
Same retrenchment, same R700,000, R74,700 more tax — entirely because of something that happened years earlier.
So before you model anything, establish whether you have taken a retirement lump sum or an earlier severance benefit at any point in your working life. That single fact can move the outcome by more than the negotiation will.
Most of the package is taxed as ordinary income
The second misunderstanding is quieter and catches almost everyone.
A retrenchment payout is usually several different things in one payment. The severance benefit itself sits in the table above. But the other components are ordinary remuneration and are taxed under the normal rules at your marginal rate:
- Notice pay, where you are paid for a notice period instead of working it.
- Accrued leave paid out.
- A pro-rata bonus or thirteenth cheque.
- Outstanding commission or allowances.
None of those are lump sums paid because the office or employment ended in the sense the definition describes — they are amounts you had already earned. So the headline "first R550,000 tax free" applies to one slice of the package, not the total.
This is also why two packages with the same total can be taxed very differently depending on how they are made up, and why it is worth asking for a breakdown in writing rather than a single number.
The same rand can cost nothing or a great deal
Because the two parts of a package are taxed on different bases, an identical amount can produce very different tax depending on which one it falls into.
Take someone with no previous lump sums, on a 36% marginal rate, and R200,000 of the package in question.
- Inside a qualifying severance benefit, where the total severance is still below R550,000, that R200,000 is taxed at 0%.
- Paid as accrued leave or notice pay, it is ordinary income at the marginal rate — R72,000.
Same money, same employer, same week. The difference is entirely which bucket it belongs to.
One important caution: this is a reason to understand your breakdown, not a reason to ask for it to be relabelled. Whether a payment is a severance benefit follows from what the payment actually is, and it is settled in the tax directive — not by what the letter calls it. Leave pay is leave pay however it is described, and misdescribing it is a problem you do not want.
What it does justify is asking questions early. Where a package is still being structured, understanding which elements attract which treatment is legitimate and useful, and it is far easier to ask before the directive is applied for than to query it afterwards.
Do not confuse it with the withdrawal table
There is a second, harsher table that applies to retirement fund withdrawal benefits — money taken out of a fund before retirement, such as when a fund is cashed out on leaving a job:
| Amount | Tax |
|---|---|
| R1 – R27,500 | 0% |
| R27,501 – R726,000 | 18% of the amount above R27,500 |
| R726,001 – R1,089,000 | R125,730 + 27% of the amount above R726,000 |
| R1,089,001 and above | R223,740 + 36% of the amount above R1,089,000 |
The difference at the bottom is stark: R550,000 at 0% against R27,500 at 0%. Both tables also draw on the same cumulative history.
That matters at retrenchment because two decisions often arrive together — what happens to the severance benefit, and what happens to the pension or provident fund you are leaving behind. Cashing the fund out is a withdrawal, taxed on the second table and consuming cumulative room. Preserving or transferring it is not. Deciding those two questions independently, without seeing how they interact, is how people end up paying more than they needed to.
The tax directive decides it
You do not calculate this yourself and hope. Your employer applies to SARS for a tax directive, and SARS returns the amount of tax to be withheld, taking your cumulative history into account.
Two practical consequences. First, whether a payment qualifies for severance treatment at all is determined through that process rather than by what anyone calls it in a letter — not every termination payment qualifies, so do not assume the label decides the tax. Second, the directive is the document that reveals your cumulative position, so ask to see it. If the number is not what you expected, that is where the explanation lives.
What to do
- Ask for a written breakdown of the package — severance benefit, notice pay, leave, bonus, commission — rather than a single total.
- Establish your lump sum history. Any earlier retirement lump sum or severance benefit has already used part of the cumulative band.
- Ask to see the tax directive when it comes back, and check the figures against the table.
- Treat the fund decision separately and carefully. Cashing out a retirement fund is taxed on the harsher withdrawal table and draws on the same lifetime history.
- Model your year, not just the payment. A retrenchment part-way through a tax year changes your total taxable income, and our income tax calculator will show what the rest of the year looks like.
- Claim what you are owed elsewhere. UIF is separate from all of this — see our guides on claiming UIF and the UIF calculator, and use the retrenchment calculator for the payout side.
For everything else, start at our money guides.
Frequently asked questions
Is the first R550,000 of a severance package really tax free? The first R550,000 of a qualifying severance benefit is taxed at 0% — but the band is cumulative across your lifetime, and it applies to the severance benefit itself, not to the whole package.
What is a severance benefit? SARS defines it as a lump sum from, or by arrangement with, an employer due to the relinquishment, termination, loss, repudiation, cancellation or variation of a person's office or employment.
Why was my tax higher than the table suggested? Most likely because an earlier retirement lump sum or severance benefit had already used part of the cumulative band. Each new lump sum is taxed against all prior ones combined.
How is my notice pay and leave pay taxed? As ordinary income at your marginal rate. They are amounts already earned, not part of the severance benefit.
Does the table change every year? SARS states that this table applies to the 2025, 2026 and 2027 tax years without change.
What is the difference between the severance table and the withdrawal table? The severance and retirement benefit table starts taxing above R550,000. The withdrawal table, which applies to money taken out of a retirement fund before retirement, starts taxing above R27,500.
Should I cash out my retirement fund when retrenched? That is a withdrawal, taxed on the harsher table and drawing on the same cumulative history as your severance benefit. Look at both decisions together before making either.
Who works out the tax? Your employer applies to SARS for a tax directive, and SARS specifies the tax to withhold based on your cumulative lump sum history. Ask to see it.
