Tax treatment of employee termination payments

When an employee has his employment terminated, he may receive various types of payments as part of a severance package.

Keywords: Mazars, Thailand, Tax, Severance pay, Tax treatment, Termination payments, Personal income tax, PND.91

16 December 2019

For example, he may receive the following:

1. Statutory severance pay under labour law

2. Non-statutory severance pay

3. Additional payments based on duration of employment

4. Pay-out from a provident fund

5. Payment for unused annual leave

6. Payment in lieu of a required notice period

7. Retirement benefits

8. Compensation for unfair dismissal

There are different tax treatments for these payments. Whilst some payments are tax free, others are tax-free up to a capped amount, and some are entitled to a special deduction. We will focus on some of the more common cases.

Exemption for severance pay not exceeding THB 300,000 and not exceeding 10 monthssalary

If an employee is terminated by his or her employer without grounds, as provided under Section 119 of the Labour Protection Act, 2541, (1998), he is entitled to severance pay under Section 118 of that Act. A portion of severance pay not exceeding THB 300,000 and not exceeding 10 months’ salary that the employee receives from the employer is exempt from personal income tax under Clause 2 (51) of the Ministerial Regulation (M.R.) No. 126. Any amount over THB 300,000 or the equivalent of 10 months’ salary is subject to personal income tax, which must be withheld by the employer. However, where the employee has worked continuously for that employer for 5 years or more, the employee may be entitled to a special deduction for a “one-time payment” under Section 48 (5) of the Revenue Code, as noted in the section below.

If the employee takes voluntary redundancy (for example, by submitting a resignation letter to the employer or by signing a mutual agreement on voluntary redundancy), the employee is not eligible for a tax exemption for the severance pay or any other payment received due to termination under Clause 2 (51) of MR No. 126, . Similar to above, in the case where the employee has worked for that employer for a continuous period of 5 years or more, the severance pay or any payment received from the employer may be entitled to a special deduction.

Special deduction for a one-time payment

Where an employee has worked continuously for an employer for 5 years or more prior to termination (either voluntary or compulsory), he is entitled to a special deduction for a one-time payment (such as a gratuity, severance pay, or a pay-out from a provident fund). When calculating the personal income tax to be withheld by the employer, two additional expenses will be deducted from the employee’s income by taking the following steps.

  • Step 1: Expenses shall be allowed on this income for an amount equal to THB 7,000 multiplied by the number of years of employment, but not exceeding the amount of this income.
  • Step 2: Further expenses shall be allowed at the rate of 50% of the remainder.

The personal income tax shall be calculated based on the result derived from the special deductions above according to the tax table below:

One-time payment due to termination of employment (in Thai baht)

Tax rate

1 – 300,000

5%

300,001 – 500,000

10%

500,001 – 750,000

15%

750,001 – 1,000,000

20%

1,000,001, – 2,000,000

25%

2,000,001, – 5,000,000

30%

5,000,001 and up

35%

It should be noted that, in the table above, there is a tax rate of 5% for the first bracket of income, instead of 0% rate.

The employer shall calculate the personal income tax to be withheld from the one-time payment using the above calculation method, and shall calculate the tax to be withheld on the salary using the standard calculation method. The employee is entitled to choose not to include the portion of one-time payment in his salary when filing the annual personal income tax return (Form PND.91). Therefore, the withholding tax on this one-time payment will be regarded as a final tax payment, and the employee will be required to declare only his salary in the tax return, while the one-time payment will be declared separately in an attachment to the tax return.

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