Retrenchment in South Africa — process, pay and tax
Retrenchment is a dismissal for operational requirements under section 189 of the Labour Relations Act. The employer must consult in good faith before deciding, and a retrenched employee is entitled to at least one week's severance pay for every completed year of service, plus notice pay and payment for accrued annual leave.
Payroll Africa Editorial · SARS Payroll Compliance Team
The Payroll Africa editorial team is composed of registered tax practitioners, payroll administrators and BCEA specialists who maintain the SARS PAYE, UIF, SDL and ETI engines that power the platform. Every article is reviewed against the current SARS BRS and Basic Conditions of Employment Act before publication.
- SARS registered tax practitioners
- SAPA-affiliated payroll administrators
- BCEA and LRA compliance reviewers
Last updated 26 Aug 2026
The section 189 consultation process
An employer that contemplates retrenchment must issue a written section 189(3) notice and consult before any decision is taken. Skipping or rushing consultation is the most common reason retrenchments are found procedurally unfair.
- Issue a written section 189(3) notice with reasons, numbers and proposed criteria
- Consult the union, workplace forum or affected employees directly
- Consider alternatives: short time, redeployment, voluntary packages, attrition
- Apply fair and objective selection criteria (commonly LIFO, skills or performance)
- Employers with 50+ employees retrenching in bulk must follow the section 189A facilitation route
What a retrenched employee is paid
The statutory minimum package has four parts. A contract, policy or bargaining council agreement may improve on it, never reduce it.
- Severance pay: at least one week's remuneration per completed year of service
- Notice pay: one week (under 6 months), two weeks (6–12 months) or four weeks (over 1 year)
- Accrued annual leave paid out in full
- Any pro-rata bonus or commission owed under contract
- A certificate of service, and the UI-19 for the UIF claim
How retrenchment pay is taxed
Severance benefits are taxed under the special retirement/severance tax table, not the normal PAYE tables. The first R550,000 of the cumulative lifetime severance and retirement lump sums is taxed at 0%, then 18%, 27% and 36% on the bands above it.
The employer must apply to SARS for a tax directive before paying a severance benefit — paying first and correcting later creates an EMP501 reconciliation problem. Notice pay and leave pay-outs are ordinary remuneration and taxed at normal PAYE rates.
- Severance benefit: SARS tax directive required (IRP3(a))
- First R550,000 lifetime: taxed at 0%
- Notice pay and leave pay-out: normal PAYE
- Severance reported under IRP5 code 3901; leave pay-out under 3605/3907 as applicable
- Employee may claim UIF unemployment benefits from the date of retrenchment
Running the termination on payroll
Payroll Africa handles the retrenchment run end to end: it calculates severance from the employee's actual service, applies the directive amount to the severance component so PAYE is not over-withheld, pays out accrued leave, marks the termination reason correctly for the UI-19, and closes out the IRP5 with the right source codes.
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