South Africa · BCEA & SARS
Severance pay calculation in South Africa: the 2026 employer's guide
When you retrench an employee in South Africa, the law sets a minimum severance package. Get the calculation wrong and you face CCMA disputes, additional liability, and SARS penalties on the tax directive. This guide walks through the BCEA formula, what counts as remuneration, worked examples, and how SARS taxes the payout.
Under section 41 of the Basic Conditions of Employment Act (BCEA), the minimum severance pay is:
1 week's remuneration × completed years of continuous service
This is a floor, not a ceiling. A contract of employment, collective agreement, or company policy may set a higher amount — and a CCMA commissioner can order more if the retrenchment process was procedurally unfair.
Interactive severance pay calculator
Estimate the statutory BCEA severance pay and the SARS tax on the lump sum. For final sign-off, Patuza calculates the exact figure and applies for the IRP3(a) directive on your behalf.
Gross monthly basic — before PAYE, UIF or any deductions.
Add regular cash allowances (transport, housing, cellphone) and employer contributions to medical aid / retirement. Exclude reimbursements and once-off bonuses.
Only fully completed years count under BCEA s.41 — partial years round DOWN. E.g. 6 years 11 months = 6.
SARS aggregates lifetime lump sums. Enter 0 if this is the first. Prior amounts eat into the R550,000 tax-free portion.
- One week's remuneration
- R 6 923,08
- Gross severance pay
- R 41 538,46
- Estimated SARS PAYE (directive)
- R 0,00
- Estimated net to employee
- R 41 538,46
Step-by-step breakdown (tax base & rounding)
- Monthly remuneration = basic + allowances/benefits = R 30 000,00
- One week's remuneration = monthly × 12 ÷ 52 = R 6 923,08 (kept at full precision internally)
- Completed years = 6 (partial years rounded down — BCEA s.41)
- Gross severance = weekly × years = R 6 923,08 × 6 = R 41 538,46
- SARS lifetime aggregate = prior lump sums + this severance = R 0,00 + R 41 538,46 = R 41 538,46Band reached: R0 – R550,000 · 0%
- Tax on this severance = tax(aggregate) − tax(prior) = R 0,00
- Net to employee = gross − PAYE = R 41 538,46
Rounding: intermediate values are kept at full precision; only displayed Rand amounts are rounded to 2 decimals. SARS rounds the final PAYE to the nearest cent on the IRP3(a) directive itself.
Estimate only. Tax uses the SARS severance / retirement lump-sum table with a R550,000 lifetime tax-free aggregate. The final amount depends on the IRP3(a) directive issued by SARS.
When does severance pay apply?
Severance pay under section 41 is owed when an employer dismisses an employee for operational requirements — what most people call retrenchment. It does not apply to:
- Dismissals for misconduct or poor performance.
- Resignation by the employee.
- End of a fixed-term contract that has reached its agreed end date.
- An employee who unreasonably refuses suitable alternative employment (section 41(4)).
What counts as a "week's remuneration"?
The BCEA's Ministerial Determination on remuneration (Government Notice R.691 of 23 May 2003) defines remuneration broadly. For severance, include:
- Basic salary or wage.
- Payment in kind that has a cash value (e.g. company housing, vehicle, fuel).
- Employer contributions to medical aid and retirement funds.
- Regular allowances paid as cash — housing, transport, cellphone.
- Commission and production bonuses, averaged over the preceding 13 weeks.
Exclude:
- Reimbursive expenses (the employee just being refunded for outlay).
- Ad-hoc gratuities, gifts, or discretionary one-off bonuses.
- Share-scheme gains and once-off relocation allowances.
- Overtime that is not regular and structured.
Worked examples
Example 1 — Salaried employee, 6 years
Thandi earns a basic salary of R26,000 per month plus a R3,000 cash transport allowance and R1,000 employer medical aid contribution. She has 6 years and 7 months of service.
- Monthly remuneration: R26,000 + R3,000 + R1,000 = R30,000
- One week (monthly × 12 ÷ 52): R30,000 × 12 ÷ 52 ≈ R6,923.08
- Completed years of service: 6 (the 7 months don't round up)
- Minimum severance: R6,923.08 × 6 = R41,538.46
Example 2 — Hourly employee with commission, 4 years
Sipho works 45 hours per week at R85/hour and earned R18,000 in commission over the last 13 weeks. Service: 4 years exactly.
- Weekly wage: 45 × R85 = R3,825
- Average weekly commission: R18,000 ÷ 13 = R1,384.62
- One week's remuneration: R3,825 + R1,384.62 = R5,209.62
- Minimum severance: R5,209.62 × 4 = R20,838.46
Other amounts owed on retrenchment
Severance is just one line on the final payslip. The employee is also entitled to:
- Notice pay — 1 week (under 6 months service), 2 weeks (6–12 months), or 4 weeks (over 12 months), or pay in lieu of notice.
- Accrued annual leave — paid out at the employee's current rate.
- Pro-rata 13th cheque or bonus — if the contract or policy provides one.
- Any outstanding salary, commission or expense reimbursements.
How SARS taxes severance pay
Severance benefits are taxed under the retirement lump sum benefit tax table— the same favourable rates as a retirement lump sum, not as ordinary monthly PAYE. The current bands (as published by SARS) are:
| Taxable severance benefit | Rate of tax |
|---|---|
| R0 – R550,000 | 0% (tax-free) |
| R550,001 – R770,000 | 18% of the amount over R550,000 |
| R770,001 – R1,155,000 | R39,600 + 27% over R770,000 |
| R1,155,001 and above | R143,550 + 36% over R1,155,000 |
The R550,000 tax-free portion is a lifetime aggregate — SARS combines any prior severance benefits and retirement lump sums (since 1 March 2009) to determine how much of the threshold is still available.
The IRP3(a) tax directive — don't skip this
You may not pay the severance lump sum until you have an IRP3(a) tax directivefrom SARS. The directive tells you exactly how much PAYE to withhold. Steps:
- Apply on SARS eFiling under Tax Status → Tax Directives.
- Reason code: 04 — Severance benefit (involuntary termination).
- Receive the directive (usually within a few working days).
- Process the lump sum on the payroll using directive code 3901.
- Reflect on the IRP5 at year-end against the directive number.
Refusal of alternative employment
Section 41(4) of the BCEA is the most-litigated part of the severance regime. If the employer (or another employer in a transfer scenario under section 197) offers suitable alternative employment and the employee unreasonably refuses, the statutory severance pay falls away. Suitability is judged objectively — remuneration, status, location, job content, and the employee's personal circumstances all weigh in. Document the offer and the response carefully.
Common mistakes employers make
- Using basic salary only and excluding cash allowances and employer benefits.
- Rounding service down to whole years incorrectly — use completed years.
- Forgetting the 13-week commission/overtime average.
- Paying without an IRP3(a) directive, then under- or over-withholding PAYE.
- Coding the lump sum as ordinary salary (3601) instead of severance (3901).
- Treating the R550,000 threshold as per-event instead of lifetime aggregate.
Patuza Payroll Specialists handles the full retrenchment payroll: BCEA calculation, IRP3(a) tax directives with SARS, correct PAYE codes (3901), EMP201 reconciliation, and year-end IRP5s. A Certified Payroll Practitioner and Registered Tax Practitioner signs off every cycle.
Related guides
Severance pay rarely sits on its own — these adjacent topics usually come up in the same retrenchment or final-payslip conversation.
- Notice pay in South Africa (BCEA s.37) →
1 / 2 / 4-week rules, pay in lieu, and how notice pay differs from severance.
- UIF contributions & retrenchment claims →
1% + 1% UIF, the R17,712 ceiling, UI-19 declarations and retrenched-worker claims.
- Payroll options for South African businesses →
In-house vs outsourced vs hybrid — and which handles retrenchment cycles best.
- Sage vs SimplePay vs Patuza compared →
Software vs managed payroll for processing severance, IRP3(a) directives and IRP5s.
This guide is general information based on the Basic Conditions of Employment Act and SARS guidance current at the time of writing. It is not legal or tax advice. For a binding opinion on a specific retrenchment, consult a labour lawyer or registered tax practitioner.