Getting a tax refund on ceasing employment has surfaced a couple of times in recent weeks. The most relevant and eye-opening one was in a prospect meeting earlier this week. Both involved an exit package from their employers. So, there was a bonus or termination payment on top of salary at the time of ceasing. We’ll look at
- Prospect meeting
- Tax Refund
- How it works
- Ben’s surprise
- Planning
Prospect Meeting
Dee, the chief organiser in the office, had a meeting booked for me on Monday afternoon. After discussing the kids and the Dublin riots, I asked her about who was coming in and what help they needed. She sent me the e-mail chain, and I could see it was a tax refund review.
Ben Downey hobbled in the door at 4 o’clock. Bad knees after plenty of sport as a young fella. He has two kids in college and medical expenses to claim for 4 tax years 2019 to 2022. He knew he had to claim for 2019 before the end of December as otherwise he’d be outside the 4-year window.
We got chatting about a new company he set up in the Pharma space. Having left his previous employer in January 2022, he had devoted his time to getting this new venture set up. He was looking for bookkeeping and accounting support for that too. Ben used to manage another pharma company which the owner sold in early 2022. Ben, in his words, got well looked after on ceasing employment at that time.
He came well-prepared for the meeting. Armed with the myAccount details of wife Dawn, we decided to take a look at 2022 to see what the salaries were. Given that he got a “package” at the time of leaving, my thinking was that there could be a tax refund owed. A refund that would be much larger than what you’d get for medical expenses and college fees.
Tax Refund
Dawn was on standby with codes to gain access. I had a look at the employment detail summary for both of them and could see straight away there was money due back. A chunky tax refund based on doing some quick calculations in my head. Not rocket science by any means, as I will explain. I don’t remember exact numbers, but the following would be close
| Ben Gross Salary | €41,000 |
| Taxes deducted | €15,000 |
| Dawn Gross Salary | €31,000 |
| Taxes deducted | €3,500 |
Looking at Ben’s numbers you can see straight away that €15,000 tax on a €41,000 salary is way too much. If you combine both salaries, they should only be paying tax at the lower 20% rate. But Ben paid 40% on most of his. Will explain why that is below. Paying 20% on €70,000 or so is €14,000. And that’s before deducting tax credits. They paid €18,000. So, what should the refund be?
Run the numbers
| Ben’s salary | €41,000 |
| Dawn’s salary | €31,000 |
| Total | €72,000 |
| Tax at 20% | €14,400 |
| Less Tax credits | |
| Married Tax credit | €3,300 |
| PAYE Tax credits €1,650 x 2 | €3,300 |
| Tax liability | €7,800 |
| Tax Paid | €18,000 |
| Refund due | €10,200 |
And that refund is before the other things they have to claim for 2022. Tuition fees, rent credit, and medical expenses could increase the refund by another €2,000. It seems crazy that you could overpay tax by so much. True. But that’s how the tax system works!
How it works
What piqued my interest when Ben said he got a package, was his date of leaving in 2022. End of January. Plus, he had no other income for the rest of the year. Not even jobseeker’s payments. That meant that he only got one month’s tax credits and lower rate band. So, he missed out on 11 months of lower rate band and 11 months of tax credits.
Let’s assume that his lower rate band for 2022 was €45,800 or €3,816 per month. And also assume that his salary was €6,000 per month, and he got a bonus of €35,000 on leaving. Another assumption is that he gets 50% of the tax credits for the year of €3,300. That’s €275 per month. Payroll for Ben, at the end of January 2022, would look something like this
| Salary | €6,000 |
| Bonus | €35,000 |
| Total | €41,000 |
| First €3,816 x 20% | €763 |
| Next €37,184 x 40% | €14,874 |
| Total Tax | €15,637 |
| Less Tax credit | €275 |
| Tax deducted | €15,361 |
And that’s how it works folks! And it’s right. If Ben got another job later in 2022, he would have got the benefit of the unused tax credit and rate band in that job. But he didn’t, so the refund sat there. Until now.
Ben’s surprise
It was a surprise to Ben when he saw his gross salary on his Employment Detail Summary [EDS]. In his head, the number was a lot higher than €41,000. I asked if he had a copy of his last payslip. He didn’t but he could get it. My thinking was that some of his package was tax-free and then wouldn’t appear on his EDS. What would be tax-free would include
- Statutory redundancy
- Tax-free termination payment
As it was a company sale, his role no longer existed and that entitled him to statutory redundancy. He only worked there for a few years and, as a result, that number wasn’t going to be large.
Termination payment
A part of an exit package can be a termination payment. Some of this can be tax-free. A basic amount will be, and that can increase by €10,000. The amount you can get tax-free depends on your salary and years of service. Those on higher salaries with long service can get more. The basic exemption is €10,160 plus €765 for each year of service.
Say Ben had 5 years’ service, then he could get €13,985 tax free. The increased exemption allows an extra €10,000 on top of the basic number. There is interaction with pensions numbers in these calculations so it’s good to be aware of that. Ben’s package could be like this
| Statutory redundancy | €6,000 |
| Bonus | €59,000 |
| Total package | €65,000 |
| Less statutory redundancy | €6,000 |
| Less increased exemption | €24,000 |
| Taxable bonus | €35,000 |
| Add salary | €6,000 |
| Total Taxable pay | €41,000 |
Planning
Are there planning opportunities when exiting a business? Yes, there are. I don’t know if there was a cunning plan in designing Ben’s exit package. If there was, someone should have told Ben. And maybe they did, but he was too busy getting his new business up and running to care about it in the short term. The timing was excellent. I have seen this before in larger corporates delaying the exit to the start of a new year. Especially when an employee intends to retire.
If you are planning to exit your business, there are opportunities. I wrote a blog on this topic before called Don’t Forget Termination Payments. This also applies to owner directors and is something we have used in the past for our clients.
Resting with Revenue
Millions of euros in overpaid taxes rest with Revenue every year. Navigating the tax system can be tricky. Getting a qualified tax consultant to review your taxes can lead to refunds. And if there’s no money to be had you get peace of mind that everything is right. There were hundreds of cases before the Tax Appeals commissioners in the last 10 years. All were unsuccessful where they were outside the 4-year claim period. If you are due money back for 2019, get your skates on.
Ben and Mary are gone off to complete tax checklists and gather paperwork for their payday. They’ll get thousands back. Sure, it’s better than a slap in the face with a wet fish!
Do you need help to review your taxes? If so, start here
