What is a tax directive?
A tax directive is an instruction from the South African Revenue Service (SARS) telling an employer, or a retirement fund, how much employees’ tax to withhold from a payment that is not ordinary salary. Employers must have one before paying a lump sum such as a severance benefit or a gratuity, and SARS works out the tax from the reason for the payment, the date it accrues and the employee’s annual remuneration.
Need help navigating local labour compliance?
Schedule a strategy callWhen an employer needs one
Under paragraph 9(3) of the Fourth Schedule to the Income Tax Act, employers must apply for a directive for any lump sum paid as a severance benefit, a gratuity or any other amount, whatever its size. Only the employer can apply, and employers should not accept directives that employees obtained themselves. The main forms are:
- IRP3(a), for gratuities and severance benefits on death, retirement, ill health or retrenchment;
- IRP3(s), for gains on employee share schemes under section 8C;
- IRP3(b) and IRP3(c), for a fixed percentage or fixed amount of PAYE, which the taxpayer or their tax practitioner applies for.
Lump sums from pension, provident and retirement annuity funds are handled by the fund, which applies for its own directive on separate forms.
How severance benefits are taxed
Severance benefits paid because of retrenchment, ill health or retirement from age 55 are taxed on the retirement lump sum table, not at normal rates. For the 2027 tax year, the first R550,000 is tax-free, followed by bands of 18%, 27% and 36%, and the table is applied cumulatively to the retirement lump sums and severance benefits the employee has received before. Leave pay, notice pay and pro rata bonuses paid on termination are not part of the severance benefit and are taxed at normal rates.
Paying the lump sum
Once SARS issues the directive, the employer withholds the tax it specifies, pays the net amount to the employee and shows the payment and the directive number on the employee’s IRP5. Without a directive, the employer cannot know the correct tax, and SARS can assess it for any employees’ tax that should have been withheld.
Tax directives when TopSource runs your payroll
When TopSource runs your payroll in South Africa, we apply for the directive as soon as a lump sum is agreed, withhold the tax SARS specifies and show the payment and directive number on the employee’s IRP5.
Frequently asked questions
Who applies for a tax directive on a severance package?
The employer. Employees cannot submit the IRP3(a) themselves, and employers should not accept directives that employees obtained on their own.
Is a severance package tax-free in South Africa?
Partly. Qualifying severance benefits are taxed on the retirement lump sum table, where the first R550,000 is tax-free, taking into account earlier lump sums the employee has received.
Is a tax directive needed for small lump sums?
Yes. Employers must apply for a directive for a severance benefit or gratuity whatever the amount.
Related terms in South Africa
- Temporary Employment Services (South Africa)
- Section 198B Fixed-Term Rule (South Africa)
- BCEA Earnings Threshold (South Africa)
- Retrenchment (South Africa)
- Restraint of Trade (South Africa)
- Family Responsibility Leave (South Africa)
- Sick Leave Cycle (South Africa)
- Employment Equity Act Reporting (South Africa)
- B-BBEE Scorecard (South Africa)
- Critical Skills Work Visa (South Africa)
- POPIA and Employee Data (South Africa)
- EMP201 Monthly Return (South Africa)
- EMP501 Reconciliation (South Africa)
- IRP5 and IT3(a) Certificates (South Africa)
- Fringe Benefits Tax (South Africa)
- Travel Allowance (South Africa)
- Retirement Fund Two-Pot System (South Africa)
- Employment Tax Incentive (South Africa)
- Medical Scheme Fees Tax Credit (South Africa)