As Zimbabwe strengthens its employment tax and tax administration systems, a critical area requiring clarity is the taxation of termination payments. Whether arising from retirement, resignation, dismissal, or retrenchment, termination payments represent a key aspect of employment taxation. The complexity of these payments, coupled with the need for compliance with the Income Tax Act, demands both understanding and accuracy to avoid disputes with the Zimbabwe Revenue Authority (ZIMRA), unexpected tax liabilities, and compliance penalties.
The Nature of Termination Payments:
- Termination payments are a key part of employment taxation in Zimbabwe, arising when employment ends and covering items like pensions, gratuities, leave pay, and retrenchment packages. The Income Tax Act treats this as gross income subject to payroll tax but offers exemptions and reliefs to reduce the tax burden in certain cases.
Taxability and Exemptions:
- All employment-related income is generally taxable, but the Income Tax Act differentiates based on payment type and termination circumstances. Payments in lieu of notice, wrongful dismissal compensation, and ex gratia “golden handshakes” are fully taxable.
- Pensions and Annuities: Annuities and pensions are key termination benefits. Purchased annuities are taxable only on the interest portion, while those received as gifts or for services rendered are fully taxable. Pensions paid to individuals aged 55 and below are taxable, subject to deductions for unallowed contributions, while those for employees aged 55 and above are exempt under paragraph 6(h) of the Third Schedule. When commuted into lump sums, the first US$1,500 or one-third of the lump sum (up to US$10,000) is exempt, depending on the currency and nature of payment.
- Pension Withdrawals and Retrenchment Packages: Pension withdrawals or refunds are taxable after deducting the first US$1,800 and any amounts transferred to other approved funds, while transfers between pension or benefit funds are not taxed. Retrenchment packages are subject to PAYE under section 8(1)(b) of the Income Tax Act, with exemptions for foreign currency payments, including the first US$3,200 or one-third of the package (up to one-third of US$15,100 or US$3,200, whichever is greater).
Compliance and Administrative Considerations
- Employers must correctly assess both retrenchment payments and related pension benefits to determine the overall tax position. Non-compliance may lead to penalties or disputes with ZIMRA. Proper documentation, accurate PAYE calculations, and timely remittance remain essential for compliance.
Conclusion:
The taxation of termination payments under Zimbabwe’s payroll system is multifaceted, encompassing annuities, pensions, retrenchment packages, lump sums, leave pay, and other employment-related benefits. While the general rule is that such payments are taxable, the law provides targeted exemptions to cushion employees at critical stages such as retirement and retrenchment. The correct application of these rules requires careful distinction between types of payments, an understanding of thresholds and exemptions, and compliance with administrative requirements such as PAYE withholding and documentation.
How Baker Tilly Can Assist
- Calculation of payroll termination benefits
- Training on payroll management
- Monthly payroll services
Reference:
- Income Tax Act [Chapter 23:06]
By Rufaro Badze
Tax Consultant at Baker Tilly.
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