Tax on an Ex Gratia or Golden Handshake Payment in South Africa

A golden handshake or ex gratia payment made on a voluntary or performance-related exit is taxed in full as normal remuneration, at your marginal rate, in the year you receive it. It does not get the R550,000 tax-free severance treatment. SARS reserves that favourable treatment for a genuine severance benefit, which means a lump sum paid because your employer retrenched you for operational reasons, or because you reached age 55, or because you left through death, ill health or incapacity. A payment for agreeing to go, or as a reward on your way out, is none of those.

This is why the label on the payslip does not decide the tax. Calling something a golden handshake, an ex gratia amount or a severance package changes nothing. What decides it is the reason your employment ended.

What SARS counts as a severance benefit

A severance benefit is defined narrowly. It is a lump sum your employer pays you because it is ending your employment due to its operational requirements, in other words a real retrenchment or redundancy. The same treatment extends to a lump sum paid because you reached age 55, or because of your death, ill health or incapacity. A qualifying severance benefit is taxed on the retirement fund lump sum benefit table, where the first R550,000 you take across your lifetime is taxed at 0%.

An ex gratia or golden handshake payment typically arises somewhere else: a mutually agreed separation, a payment to smooth a director's departure, a discretionary thank-you for long service on resignation, or a performance-related exit deal. None of these is a termination for the employer's operational requirements, so none of them is a severance benefit. The payment is ordinary remuneration.

How the payment is taxed

Because it is not a severance benefit, the payment is added to your income for the year and taxed on the normal individual sliding scale, at the marginal rate that sits on top of your other income. The employer applies to SARS for a tax directive, usually on the IRP3(a) form, to fix how much PAYE to withhold on the lump sum, and withholds it. There is no R550,000 tax-free slice and no special table. It is taxed like a very large once-off bonus.

What the marginal rate does to a handshake

Take a manager who agrees to a mutual separation in the 2026 tax year. By the exit date they have earned R600,000 in salary for the year, and the company pays a R300,000 ex gratia golden handshake on top.

First, the tax on the R600,000 already earned, using the 2026 table. R600,000 falls in the R512,801 to R673,000 bracket:

R121,475 + 36% x (R600,000 - R512,800) = R121,475 + 36% x R87,200 = R121,475 + R31,392 = R152,867. Less the primary rebate of R17,235 = R135,632.

Now add the R300,000 handshake, taking taxable income to R900,000, which moves into the R857,901 to R1,817,000 bracket:

R251,258 + 41% x (R900,000 - R857,900) = R251,258 + 41% x R42,100 = R251,258 + R17,261 = R268,519. Less the primary rebate of R17,235 = R251,284.

Tax caused by the handshake = R251,284 - R135,632 = R115,652. That is an effective rate of about 38.6% on the R300,000, because it stacks on an already high income.

Now the contrast. If the same R300,000 had qualified as a severance benefit, and the person had no earlier lump sums, it would fall entirely inside the R0 to R550,000 band on the lump sum table, taxed at 0%. Tax of R0 instead of R115,652. That is the whole difference the reason for termination makes. You can compare the qualifying case in the retrenchment package article, see how the lump sum table works in the guide to retirement and provident fund withdrawals, and model the marginal-rate effect in the income tax calculator.

The line that catches people

If you are negotiating an exit, remember that agreeing to resign in exchange for a payment does not turn that payment into a severance benefit. Only a termination for the employer's operational requirements (or age 55, death, ill health or incapacity) reaches the R550,000 table. A voluntary or performance-based golden handshake stays fully taxable at your marginal rate, the same as the leave payout on a resignation.