How a retrenchment package is taxed in South Africa (2026/27)
Figures for the 2026/27 tax year. Prime rate checked 2 October 2026; tax tables and fees checked 30 September 2026. By AfroTech.
If you're retrenched, you may receive several payments at once: a severance package, notice pay, leave pay, and money from your retirement fund. They're taxed in different ways, and the difference can be large.
Severance pay: the first R 550 000 is tax-free
A severance benefit, the package your employer pays because your job was made redundant, is taxed on SARS's retirement lump sum table, not as normal income. The first R 550 000 is tax-free. Above that, the rate rises from 18% to 36%.
The tax-free amount is shared, over your lifetime, with any retirement fund lump sums you take at retirement or on retrenchment. Whatever you use now isn't available later.
Notice pay and leave pay are taxed normally
Payment for your notice period and for unused leave is ordinary income. Your employer adds it to your salary for the month and deducts PAYE at your normal rate, so it can push you into a higher bracket for that month.
A worked example
Say you receive a R 300 000 severance package and take R 600 000 from your pension fund in cash.
| Amount | Tax | You receive | |
|---|---|---|---|
| Severance package | R 300 000 | R 0 | R 300 000 |
| Pension fund lump sum | R 600 000 | R 74 700 | R 525 300 |
| Total | R 900 000 | R 74 700 | R 825 300 |
The severance package uses the tax-free amount first, so the pension lump sum is taxed from where it left off.
Your retirement fund: preserve if you can
When you're retrenched, a cash lump sum from your fund is taxed on the generous retirement table. But that money is your retirement. Moving it to a preservation fund keeps it invested and tax-free until you need it. If you resign instead of being retrenched, the same R 600 000 taken in cash would be taxed R 103 050 on the withdrawal table.
Your fund asks SARS for a tax directive and pays the tax before paying you, so the amount you receive is final.
Try it with your own numbers. The ZARWise calculator uses the same figures as this page.
Work out the tax on your lump sum