Taxation Rules For Gratuity

By Dave Nyam •  5 min read

If an employer gives a gratuity to a worker as a token of appreciation or goodwill, it’s typically given in connection with retirement, long service, or termination of employment. Some terms for a gratuity are golden handshakes, ex gratia payments, and severance benefits. When a retirement fund pays a member or beneficiary according to the fund’s regulations, it’s called a pension or provident fund benefit. A gratuity is not similar to any of these.

- ADVERTISEMENT -

The reason for the payment, the figure of the payment, the kind of workforce, and the worker’s marital status are some aspects that dictate how gratuities are tariffed in South Africa. This writing will explain gratuity, cover the laws involving gratuities, whether or not they are taxable, how a lump sum gratuity is tariffed, and how a leave gratuity is evaluated. It will also discuss the tariff regulations controlling gratuities in South Africa.

Taxation Rules for Gratuity

In South Africa, gratuities are governed by the Income Tax Act 58 of 1962 and SARS’ Interpretation Note 14. Gratuities are included in an employee’s gross income and are subject to employee tax, which is withheld by the employer and paid to SARS. The employer must issue an IRP5 certificate reflecting the gratuity and tax deducted. Gratuities are also subject to normal tax, assessed by SARS on the employee’s taxable income. Employees must declare the gratuity and tax deducted on their annual tax return. Gratuities may qualify for a tax exemption or concession under section 10(1)(x) or the Second Schedule to the Act.

What is a gratuity payment in South Africa?

A gratuity payment is a kind gesture given by an employer to a worker, usually in the event of retirement, long service, or termination of employment. Gratuities might come in different forms than pension or provident fund payouts, which are disbursed by retirement funds. These consist of a one-time cash payout, a gift card or voucher that can be used to buy products or services up to a predetermined amount, a contribution, which could take the form of shares being transferred or debt being waived, or a gift or reward like a watch or cell phone.

Is a gratuity payment taxable in South Africa?

In South Africa, gratuity payments are taxable. They’re included in an employee’s gross income and subject to employees’ tax, which is withheld by the employer and paid to SARS. Additionally, they’re subject to normal tax, assessed by SARS on the employee’s taxable income. However, a gratuity may qualify for a tax exemption or concession under section 10(1)(x) or the Second Schedule to the Act, depending on the payment amount, employee type, and marital regime. Section 10(1)(x) offers a basic exemption of R30,000 for any gratuity received once in a lifetime. The Second Schedule provides a special tax table for lump sum benefits with lower tax rates.

What are the rules for gratuity in South Africa?

In South Africa, a gratuity is a goodwill stipend a company/employer makes to a worker, usually during employment end, retirement, or extended service. It’s taxable unless it qualifies for a tax exemption or concession under the Act. The gratuity is included in the employee’s gross income under paragraph (d) or (e) of the Act’s section 1, depending on the payment reason. It’s subject to employees’ tax, which the employer withholds and pays to SARS. Additionally, it’s subject to normal tax, assessed by SARS on the employee’s taxable income for the assessment year. Depending on the payment amount, employee type, and marital regime, a gratuity may qualify for a tax exemption or concession under section 10(1)(x) or the Act’s Second Schedule.

- ADVERTISEMENT -

How is lump sum gratuity taxed?

A lump sum gratuity is a cash payment from an employer to an employee for goodwill or appreciation, usually when the employee leaves, retires, or serves long. It is taxed as follows:

Lump Sum Benefits Taxable Income (in Rands)Tax Rate
0 – 600,00018%
600,001 – 1,200,00027% of the amount above 600,000
1,200,001 – 1,800,000162,000 + 36% of the amount above 1,200,000
1,800,001 and above378,000 + 45% of the amount above 1,800,000

How is leave gratuity calculated in South Africa?

In South Africa, a leave gratuity is a payment made by an employer to an employee for unused annual leave days at the termination of employment, retirement, or death. The total amount is calculated by multiplying the number of unused days by the value of each day, determined by the employee’s remuneration. It’s included in the employee’s gross income and is subject to employees’ tax, withheld by the employer and paid to SARS. The employer issues an IRP5 certificate reflecting the leave gratuity and tax deducted. It’s also subject to normal tax, assessed by SARS on the employee’s taxable income. A leave gratuity may qualify for a tax exemption or concession under section 10(1)(x) or the Second Schedule to the Act.

- ADVERTISEMENT -

Keep Reading

Savings Tax in South Africa

Savings Tax in South Africa

Today we will be looking at all things tax- and savings-related, from the amount of money you can keep in your bank account without taxation

What Happens After Submitting Your Tax Return?

What Happens After Submitting Your Tax Return?

Today, we'll explore what happens to your tax return after you click ‘submit’,  and what you can expect to hear from SARS.

Difference Between Input and Output Tax in South Africa

Difference Between Input and Output Tax in South Africa

he difference between these two is the VAT paid to the tax authorities. Read on to learn the difference between input and output tax in South Africa. 

How to Activate Tax Types on eFiling

How to Activate Tax Types on eFiling

This comprehensive guide navigates through the intricacies of tax types, explaining how to activate them on the eFiling platform

How To Receive The SARS Tax Number Via SMS

How To Receive The SARS Tax Number Via SMS

How Many Times Can I Revise Tax Return?

How Many Times Can I Revise Tax Return?

so today we’ve compiled this guide to help, exploring everything you need to know about tax return revisions and SARS.

How to Avoid Donations Tax In South Africa

How to Avoid Donations Tax In South Africa

By the end of this guide, you'll be equipped with valuable knowledge to navigate the South African donations tax landscape effectively.

How to Complete the Income Tax Return (ITR14) 

How to Complete the Income Tax Return (ITR14) 

To keep things neat, tidy, and as simple as possible, tax return for companies vs individuals. The company-focused income tax return uses code ITR14.

How to Calculate Capital Gains Tax In South Africa

How to Calculate Capital Gains Tax In South Africa

How to Calculate Capital Gains Tax In South Africa. But don't fret; we're here to illuminate the art of calculating CGT in this vibrant nation.

Reasons You Still Need to File Your Tax Return 

Reasons You Still Need to File Your Tax Return 

Reasons You Still Need to File Your Tax Return. Here are some good reasons why you should file your tax return

What Happens to Your South African Taxes When You Die?

What Happens to Your South African Taxes When You Die?

This guide delves into the intricacies of what unfolds in the realm of taxes when one passes away in South Africa

How To File a Complaint with the Income Tax Department

How To File a Complaint with the Income Tax Department

But sometimes taxpayers are unhappy with how SARS treats them or their tax matters. In these cases, taxpayers can complain to SARS

How to Change From Paye to Provisional Taxpayer

How to Change From Paye to Provisional Taxpayer

More highlights will be on registering as a provisional taxpayer and calculating your first tax as a provisional taxpayer. 

All About Driving Tax in South Africa

All About Driving Tax in South Africa

Today we will be looking deeper into the ‘driving taxes’ we pay in South Africa, and everything you should know to stay compliant with them.

How to Avoid Paying Dividend Tax in South Africa

How to Avoid Paying Dividend Tax in South Africa

In this guide, we'll delve into the art of sidestepping dividend taxes, probe into whether dividends enjoy a tax-free ride in South Africa