Lump Sum Payments & Top Slicing Relief

Introduction

Arising from recent discussions, there is a change in the calculation of Top Slicing Relief (TSR) on the taxable element of a termination payment in cases where either joint assessment or separate assessment applies.

Background

The purpose of TSR is to ensure that the taxable element (i.e. the gross payment less the exempt amount) of a payment made on termination of an office or employment is not taxed at a rate greater than the taxpayer’s average rate of tax for the three income tax years prior to the tax year in which the termination payment refers.

The calculation of TSR is determined by the formula A - (P X T/I) where

• A is the tax chargeable on the taxable portion of the lump sum;
• P is the taxable lump sum;
• T is the total amounts of income tax payable for the three years preceding the tax year to which the termination payment refers; and
• I is the total amount of taxable income for the three years preceding the tax year to which the termination payment refers.

When calculating TSR in joint assessment cases, the practice to date has been to:

• determine A above by reference to the tax chargeable on the couple’s joint income;
• include both spouses’ income for the purposes of I; and
• include the tax payable on the couple’s joint income for the purposes of T.

When calculating TSR in separate assessment cases, the practice to date has been to calculate TSR based on separate assessment reviews with the overriding principle that the taxpayers are neither better off nor worse off than if joint assessment had applied. In other words, a separate calculation was carried out to ensure the TSR was the same as would apply in joint assessment cases.

Current Issue

The question was raised in the course of recent discussions as to whether elements A, T and I of the TSR formula should, in joint assessment cases, be determined by reference to either

• the joint total incomes and tax payable of both spouses; or
• only the total income and tax payable of the spouse in receipt of the termination payment.

Revenue now accepts that TSR may be calculated by reference to whichever of the two above is more favourable for the taxpayer.

The new procedure applies to married couples who are jointly assessed or who are taxed under separate assessment within joint assessment (Section 1023 of the Taxes Consolidation Act 1997) but does not apply to married couples who, for the relevant tax years, have elected to be treated under Section 1016 of the Taxes Consolidation Act 1997 as not married for tax purposes.

Cases already settled will not be re-opened unless there is, subject to the four-year time limit on claims for repayment, a specific request from the customer.

Current Issue

John and Mary are a married couple who have been assessed to tax under joint assessment for all relevant tax years.

On 30th April 2006, Mary (the non-assessable spouse) was made redundant and received a termination payment, the taxable element of which, after exemptions, was €90,000. Their income for all relevant years is as follows -

	Emoluments Assessable Spouse	Emoluments Non-assessable Spouse
2003	€60,000	€25,000
2004	€70,000	€25,000
2005	€80,000	€25,000
2006 Taxable Element of lump sum	€90,000	€10,000 €90,000

Computation under Joint Assessment:

Married Personal Tax Credit and PAYE tax credits are due each year

Year	Taxable Income	Tax Payable
2003	€85,000	€18,740
2004	€95,000	€22,460
2005	€105,000	€25,464
Total	€285,000	€66,664

Tax chargeable (A) on the taxable portion of the lump sum in 2006 is €34,940. The Top Slicing Relief (A - (P X T/I)) is -

€34,940 - (€90,000 ×

€66,664)

€285,000

= €13,888.21

Notional Computation as if Separate Assessment applied (under which only the income and tax of the spouse receiving the termination payment is taken into account):

Single person’s Tax Credit and PAYE credit due

Year	Taxable Income	Tax Payable
2003	€85,000	€18,740
2004	€95,000	€22,460
2005	€105,000	€25,464
Total	€285,000	€66,664

Tax chargeable (A) on the taxable portion of the lump sum in 2006 is €32,960. The Top Slicing Relief is:

€32,960 - (€90,000 ×

€7,270)

€75,000

= €24,236

Under these circumstances, the more beneficial Top Slicing Relief of €24,236 should be allowed.

Final Computation for 2006:

Joint

Income - Assessable Spouse	€ 90,000
Income - Non-assessable spouse
(€10,000 + €90,000)	€100,000
Total Income	€190,000

64,000 @ 20%	12,800
126,000 @ 42%	52,910
	65,720

less credits

Personal Credit	3,260
Paye Credit	2,980
	6,240

Tax Liability	59,480
Top Slicing Relief	24,236
Net Liability	35,244

Separate Assessment - Assessable Spouse

Income- Assessable

€90,000

32,000 @20%	6,400
58,000 @42%	24,360
	30,760

less credits

Personal Credit	1,630
Paye Credit	1,490
	3,120

Liability

27,640

Separate Assessment - Non Assessable Spouse

Income- Assessable

€100,000

32,000 @20%	6,400
68,000 @42%	28,560
	34,960

less credits

Personal Credit	1,630
Paye Credit	1,490
	3,120

Tax Liability	31,840
Top Slicing Relief	24,236
Net Liability	7,604