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A client recently approached Praxima for assistance on understanding the tax treatment of redundancy payments in Malawi. The specific question concerned the exemption provided under paragraph (ra) of the First Schedule to the Taxation Act and how any amount exceeding MWK50,000 should be taxed.
The query was twofold:
Paragraph (ra) of the First Schedule to the Taxation Act provides:
“There shall be exempt from income tax—(ra) up to K50,000 of any amount paid by any employer to an employee who has been declared redundant, not being notice pay or commutation of leave.”
Accordingly, the first MWK50,000 of a qualifying redundancy payment is exempt from income tax. This exemption does not apply to notice pay or leave commutation, which remain fully taxable.
The balance above MWK50,000 must be taxed in accordance with the applicable income tax rates on taxable income. It is not subject to a separate flat rate.
To determine the correct tax liability, the taxable portion of the redundancy payment (after deducting the MWK50,000 exemption) must be added to the employee’s annual salary. The total taxable income for the year is then assessed using the progressive annual tax rates.
This confirms that the excess is taxed under the standard PAYE framework.
Redundancy pay does not constitute a fringe benefit and must not be taxed as such.
The Taxation (Fringe Benefits Tax) (Information and Payment) Regulations define fringe benefits to include:
The Fringe Benefits Tax (FBT) rate is currently 30%. However, redundancy payments fall outside the scope of these defined benefits. Redundancy pay itself is subject solely to income tax provisions and the MWK50,000 exemption described above.
This case confirms three principles for payroll compliance in Malaw regarding redundancy pai:
Accurate application of these rules is essential to ensure compliance and avoid misinterpretation of the applicable tax rates.
If this article raised questions or highlighted areas you’d like to understand better, let’s talk.Our team can walk through the details, implications, and practical considerations for your business.
