Lump sum payments made to employees on termination will need to be added using a custom once-off income item. In addition to this custom item, you will need to add the system termination lump sums item; adding this item to a payslip will affect every other item on the payslip. We suggest that you issue the employee with a normal payslip for his / her last month, then create a once-off payslip, with this item and all the items that make up part of the lump sum.
Please note: We strongly recommend that the date of the once-off payslip be the same as that of the final normal payslip – in order for the tax calculation on the final normal payslip to be correct.
The above concepts are discussed in more detail in the following articles:
Once you have created the once-off payslip, you can add the termination lump sum item by clicking on Add (next to Payslip Inputs) > Termination Lump Sums.
Leave Paid Out
Leave Paid Out is remuneration in connection with the services rendered by employment, rather than termination i.e. Leave paid out is accrued because of work completed, as opposed to because of termination of employment.
The tax treatment and subsequent reporting of leave paid out will depend on the type of leave / the reason that it was accrued/allocated to the employee. Please see below:
- normal annual encashment paid out is subject to both tax and UIF and is reported under 3605;
- any additional leave paid out is treated as a lump sum, not subject to UIF and reported under 3907
More about Leave Paid Out can be found here
All items on the payslip will be UIF exempt. You should, therefore, not include items on the payslip where those items are not legally UIF exempt.
Under certain circumstances, SARS allows part of the final payment to an employee on termination to be tax exempt, or taxed at a lower rate. This includes pay for retrenchment. SARS issues employers tax directives to provide specific (explain what the tax directive does – SARS says how much tax to pay)
Note that application must be made for this via the IRP 3(a) form. This can also be done via eFiling.
More information about tax directives, including the various application forms, is available on this SARS page.
In order to pay your employee a termination lump sum, a tax directive from SARS is needed to indicate the amount of tax that will be deducted from the employee’s payslip. On the Termination Lump Sums page you will be required to add the following details as indicated on your tax directive:
- Directive Number
- Directive Issue Date
- Directive Income Source Code – Please select the dropdown option that matches the Source Code indicated on your tax directive
- Amount of Tax to Deduct (from Tax Directive)
- Directive Income Amount
The system forces you to enter a directive number to prevent errors during bi-annual filing, when you might want to import your tax certificates into [email protected]
IRP5 / IT3 (a) codes
All remuneration, except leave paid out, will reflect under code 3907 or 3901 on the IRP5 depending on the source code you have selected. Leave paid out will reflect on the IRP5 under code 3605. You should use the built-in leave paid out item for this; otherwise, it will also be included under code 3907 or 3901. Remember to only include items on the payslip that were included on the application form for the tax directive.
Paying out leave on termination is discussed in the following article:
Depending on the source code selected in the Directive Income Source Code dropdown, the PAYE will be reported under the following source codes:
- Code 3901 will result in PAYE being reported under 4115
- Code 3907 will result in PAYE being reported under 4102