Can employees get tax relief on severance pay after a mutual termination in South Africa?

When an employment relationship in South Africa ends through a Mutual Termination Agreement (MTA), it's important to understand how this impacts the tax treatment of severance payments. Unlike retrenchments, MTAs do not automatically qualify for tax relief or allow employers to apply for a tax directive on the employee’s behalf.

What Is a Mutual Termination Agreement (MTA)?

An MTA is a voluntary agreement between an employer and an employee to end the employment relationship on agreed terms. Because it is not involuntary, SARS does not classify it as a retrenchment.

Does an MTA Qualify for Tax-Free Severance Benefits?

In most cases, no. Severance payments made under an MTA are typically treated as normal taxable income, unless specific criteria are met. SARS applies preferential tax treatment to severance payments only when the termination is involuntary.

When Does SARS Grant Tax Relief on Severance Payments?

To qualify for preferential tax rates (such as the R500,000 tax-free threshold), the termination must meet one of these conditions:

The employee is 55 years or older at the time of termination;
The termination is due to illness, accident, or injury that permanently incapacitates the employee;
The employer is ceasing to trade, or the termination is part of a general reduction in personnel.

If none of these apply—as is usually the case with a voluntary MTA—the severance is fully taxable, and a tax directive cannot be issued for tax relief purposes.

Can Horizons Apply for a Tax Directive in These Cases?

No. Horizons cannot obtain a tax directive for severance payments made under an MTA unless the case meets SARS’s criteria for involuntary termination—criteria that typically do not apply under the Employer of Record (EOR) model.

What Should Employees Know?

While an MTA may offer a more amicable exit and even a higher severance than the statutory minimum (one week’s pay per year of service), the key takeaway is:

Severance under an MTA is taxable as income;
It does not qualify for tax relief or a SARS tax directive unless specific conditions are met;
Employees should carefully consider the financial implications before accepting such terms.

Need Advice?

To better understand your tax position, it’s best to consult a South African tax advisor or financial consultant who can provide guidance based on your specific situation.

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