How is a Retrenchment Package Taxed in South Africa?

A retrenchment package is not taxed as one lump. The severance benefit portion is taxed on the SARS retirement fund lump sum benefit table, where the first R550,000 you take across your lifetime is taxed at 0%. The rest of the package, meaning leave pay, notice pay and any pro-rata bonus, is taxed separately as normal income at your marginal rate. The split matters because only the severance benefit qualifies for the R550,000 tax-free amount.

This is why two people retrenched with the same total payout can be taxed very differently, depending on how much of the package is a genuine severance benefit and how much is leave and notice pay.

What counts as a severance benefit

A severance benefit is a lump sum your employer pays because it is ending your employment due to its operational requirements, in other words a genuine retrenchment or redundancy. The same favourable treatment applies to a lump sum paid because you reached age 55, or because of death, ill health or incapacity.

When it qualifies, the severance benefit is taxed on the retirement fund lump sum benefit table:

Lump sum (cumulative)	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

The R550,000 at 0% is a once-off cumulative amount, not a fresh allowance each time. It is reduced by any retirement lump sums you have taken since October 2007 and any severance benefits since March 2011. So if a retirement fund payout earlier in your life already used part of that band, less of it is left for the severance benefit.

What is taxed as normal income

Leave pay, notice pay and a pro-rata bonus paid when you leave do not form part of the severance benefit. They are taxed as ordinary remuneration at the individual tax rates, added to whatever else you earned in the year. They also need their own directive application, separate from the severance benefit directive. The tax-free R550,000 does not shelter your accrued leave or your notice month.

A worked example

Take someone retrenched in the 2026 tax year with a R700,000 severance benefit and no prior lump sums of any kind, plus R40,000 of leave pay and R60,000 of notice pay.

The severance benefit on the lump sum table:

R0 to R550,000 at 0% = R0 The R550,001 to R700,000 portion is R150,000 at 18% = R27,000 Tax on the severance benefit = R27,000

The leave pay and notice pay, R100,000 together, are added to the rest of the year's income and taxed at the person's marginal rate. If that marginal rate is 26% for the 2026 year (taxable income between R237,101 and R370,500), the tax on this part is about R100,000 x 26% = R26,000.

Total tax on the package = R27,000 + R26,000 = R53,000, of which R27,000 is on the R700,000 severance and R26,000 is on the R100,000 of leave and notice pay. The first R550,000 of the severance carried no tax; the leave and notice pay was taxed in full at the marginal rate.

You can model the marginal-rate portion against your other income in the TaxRationale income tax calculator, and the retirement lump sum article sets out the same table for retirement payouts.

How the directive works

Your employer does not simply guess the tax. It applies to SARS for a tax directive, which tells it exactly how much to withhold on the severance benefit and, separately, on the leave and notice pay. The severance directive is where SARS aggregates your prior lump sums to work out how much of the R550,000 band is still available. If you want to understand that document, the article on what a tax directive is covers it, and the provident fund withdrawal guide explains the harsher table that applies if you instead cash out a fund on leaving.