Pre-May redundancy payments exempt from backdated income and health levy budget increases

In recent weeks there has been much controversy caused by the implications of the composite income levy rates for 2009 provided for in the Financial Resolution which was passed on Budget Day. The composite rates were in effect a blend of the pre and post budget income levy rates and they were stated to apply to most payments made to employees in 2009, including payments made between the 1st January 2009 and the 30th April 2009.

In particular, it was feared that taxable ex gratia redundancy payments made in the first four months of the year, which were initially subjected to the then-current rates, would become subject to the higher composite rates for 2009, with the expectation that the increased health levies would be applied in the same way.

Employers and employees alike will welcome the provisions contained in the Finance Bill 2009 and the Social Welfare and Pensions Act 2009 respectively which mean that the majority of taxable ex gratia payments made to employees whose positions were made redundant between the 1st January and the 30th April 2009 will not be subject to the higher income levy and health levy composite rates for 2009.

The Social Welfare and Pensions Act 2009 provides that the pre-budget health levy rates will apply to ex gratia redundancy payments made prior to the 30th April 2009. The first €100,100 of such payments will be subject to a health levy of 2% whilst the balance will be subject to a health levy of 2.5%.

The Finance Bill 2009, published on Friday last, includes a similar provision and taxable ex gratia redundancy payments made prior to the 30th April will be subject to a 1% income levy on the first €100,100, 2% on the next €150,020 and 3% on any remainder.

As levies are applied in tranches (i.e. these thresholds are apportioned to the period for which the payment is made, such that an individual can become subject to the higher rate in the month in which he receives a redundancy payment, although his annual income would not justify this), this may mean that employees may be entitled to seek a partial refund at the end of the year.