In a Singapore retrenchment package, the compensation for loss of employment is not taxable for the employee, because IRAS treats it as a capital receipt. Salary in lieu of notice, ex gratia payments for past service, gratuities and leave encashment are taxable as employment income. CPF follows a similar but not identical split: no CPF on compensation for loss of employment or on compensation in lieu of notice, but CPF on leave encashment and on an ex gratia payment that rewards past service. For the employer, contractual retrenchment payments are deductible, while ex gratia retrenchment payments are deductible only if the business continues.
Raffles Corporate Services works with a panel of experienced Singapore law firms who offer cost-effective and efficient legal service and advice. This article is general information only and is not legal advice.
Getting each line right matters to both sides. The employee’s tax bill depends on how the package is split, and the employer’s payroll records, CPF submission, Form IR8A and corporate tax computation all have to agree with that split. This guide covers the tax and payroll side only. For the employment law steps, such as selection, notice and notifying MOM, see our guide to what employers must do, pay and report when retrenching.
Which parts of a retrenchment package are taxable?
The table brings together IRAS’s guidance on lump sum payments and retrenchment benefits, the CPF Board’s guidance on termination payments, and IRAS’s treatment of retrenchment payments as a business expense.
| Payment | Taxable for the employee? | CPF payable? | Deductible for the company? |
|---|---|---|---|
| Compensation for loss of employment (retrenchment benefit) | No, capital in nature | No | Yes if contractual. If ex gratia, only where the business continues |
| Salary in lieu of notice | Yes | No, on compensation in lieu of notice paid by the employer | Generally yes, as a staff cost of the business |
| Ex gratia payment for past service | Yes | Yes, where given in appreciation of past service | Yes where the business continues; not where it completely ceases |
| Encashment of unutilised leave | Yes | Yes | Generally yes, as a staff cost |
| Payment for a restrictive covenant | No, capital in nature | Check the CPF Board’s guidance for your facts | Depends on the facts; take advice |
| Outplacement support | No, if IRAS’s three conditions are met | Not a cash payment to the employee | Generally yes for a continuing business; not on complete cessation |
IRAS’s three conditions for outplacement support are that it compensates for loss of office and is available only to retrenched employees, that the employer’s only cost is the fee paid to the outplacement provider or the cost of the support, and that an eligible employee who declines it receives nothing else in its place.
Why the label in the retrenchment letter does not decide the tax
IRAS looks at what each payment is really for. Compensation for loss of office stays non-taxable even if the contract or a collective agreement provides for it, or if it is calculated from years of service. But IRAS also says that where the facts show a payment was made in appreciation of past service, it is taxable however the employer describes it.
In practice, that means the retrenchment letter or separation agreement should break the package down line by line, state the basis of each amount, and keep notice pay, leave encashment and any goodwill payment separate from the compensation for loss of employment. Calling the whole package “retrenchment benefit” does not make it tax-free, and it creates a mismatch with the CPF treatment that will need to be unpicked later.
Keep the documents IRAS may ask for. For tax clearance cases, IRAS says it may request the reasons for termination, the basis of the payment, the relevant contract clauses and the termination letter or agreement. The same file supports the IR8A position for local employees.
When can the company deduct the cost?
IRAS distinguishes two kinds of retrenchment payment. Contractual retrenchment payments are those provided for in employment contracts or collective agreements. They are deductible whether or not the business completely ceases, because they are obligations the company already had to its staff.
Ex gratia retrenchment payments are everything else. They are deductible where the existing business continues, but IRAS says they are not deductible where the business completely ceases, because a discretionary payment made when income-producing activities stop is not regarded as wholly and exclusively incurred in producing income. The same continuing-business condition applies to outplacement support costs.
This matters most when a company is closing down. If the directors intend to wind down the business and want the retrenchment cost to be deductible, the employment contracts and any collective agreement should be checked first. A payment the company is contractually bound to make is treated differently from a generous gesture, even if the amounts are the same.
How does CPF apply to the final pay?
The CPF Board’s position turns on whether a payment is wages for work done or compensation for losing the job.
- Wages up to the last day of employment attract CPF as usual. The CPF Board says this remains so even if the employer offsets compensation in lieu of notice against those wages.
- Compensation in lieu of notice paid by the employer does not attract CPF.
- Retrenchment benefit and compensation for loss of employment do not attract CPF, because they are not paid for services or work done.
- Ex gratia payments attract CPF if given as a token of appreciation for past services, but not if given as compensation for loss of employment.
- Leave encashment attracts CPF because it increases the employee’s wages.
Note the one place where tax and CPF part company: salary in lieu of notice is taxable for the employee but does not attract CPF.
How should the payments be reported on Form IR8A?
For the YA 2026 form, IRAS’s guidance is to report the taxable gratuity, notice pay and ex gratia amounts, and separately the non-taxable compensation for loss of office, in item d3. Earlier years’ forms used item d4 with a breakdown of the package. Leave encashment can be reported with gross salary, fees, leave pay, wages and overtime pay. Check the explanatory notes for the year you are filing, because the field layout changes from time to time.
Timing follows entitlement, not payment. IRAS says the taxable parts of a retrenchment package are taxed in the year the employee becomes legally entitled to them, usually the year of retrenchment. The same applies to leave encashment. An employee retrenched in December 2026 and paid in January 2027 is therefore taxed on the taxable parts in YA 2027, as income for 2026. If the company is in the Auto-Inclusion Scheme, the employee does not need to declare the amounts separately because the employer submits them to IRAS. If your payroll is moving between providers around the retrenchment date, our payroll handover checklist helps keep the IR8A data consistent.
For a foreign employee or Singapore PR, tax clearance also applies. IRAS requires Form IR21 to be filed at least one month before the employee ceases employment, and the employer must withhold all monies due, including leave pay, gratuities and lump sum payments, from the point of resignation or notice. See our guide to Form IR21 and tax clearance.
Steps for the payroll and finance team
- Check the employment contract, handbook and any collective agreement for retrenchment benefit terms, so you know which payments are contractual.
- Split the package into its components in the letter or agreement: last salary, notice pay, leave encashment, compensation for loss of employment, any ex gratia payment and any covenant payment.
- Apply CPF only to the components that attract it, and pay CPF on wages up to the last day as normal.
- Decide the tax year for each taxable item by the date of entitlement, not the payment date.
- Prepare Form IR8A, or Form IR21 for a non-citizen employee, using the same split.
- For the company’s own tax computation, flag any ex gratia retrenchment payment made in a year when the business completely ceased, as it will not be deductible.
- File the letter, the calculation and the contract clauses together for the record-keeping period.
Example: splitting a package for a local employee
Example: A hypothetical company with a continuing business retrenches a Singapore citizen employee with 6 years’ service on a monthly salary of $6,000. Her contract provides retrenchment benefit of one month’s salary per completed year of service. The package is:
- One month’s salary in lieu of notice: $6,000
- Contractual retrenchment benefit: $36,000
- Encashment of 10 days’ unutilised leave: about $2,760
- An ex gratia payment of $3,000 described as thanks for her past contributions
For tax, $11,760 is taxable (notice pay, leave encashment and the ex gratia payment) and the $36,000 compensation is not. For CPF, contributions are due on the leave encashment and the appreciation payment, but not on the notice pay or the retrenchment benefit. All four payments are deductible for the company, because the business continues and the retrenchment benefit is contractual. If the company were instead closing down completely, the $3,000 ex gratia payment would not be deductible, while the contractual benefit would still be.
Documents checklist
- Employment contract, handbook and any collective agreement clauses on notice, leave and retrenchment benefit
- Retrenchment letter or separation agreement with a line-by-line breakdown
- Calculation of each component and its basis
- Final payslip and CPF submission for the last month
- Leave records supporting the encashment
- Form IR8A, or Form IR21 and IRAS’s directive for a non-citizen employee
- Board approval for any ex gratia or enhanced payment
Frequently asked questions
Is retrenchment benefit taxable if the contract fixes the amount?
No. IRAS says compensation for loss of office remains non-taxable even where it is provided for in the contract or a collective agreement, or computed from years of service.
Can we pay an ex gratia sum to an employee with less than 2 years’ service?
Yes. An employee with less than 2 years’ service has no statutory entitlement to retrenchment benefit, but nothing stops the company paying one. The tax and CPF treatment follow what the payment is really for: compensation for losing the job, or appreciation of past service.
Is salary in lieu of notice subject to CPF?
The CPF Board says CPF is not payable on compensation in lieu of notice paid by the employer. It is still taxable for the employee and must be reported on Form IR8A.
Does the company need IRAS approval before treating compensation as non-taxable?
The employer reports the non-taxable amount on Form IR8A, and IRAS may ask for the basis of the payment and the supporting documents. Keep the breakdown, the contract clauses and the termination letter ready.
Are retrenchment payments deductible if we are striking off the company?
Contractual retrenchment payments are deductible even on a complete cessation of business. Ex gratia retrenchment payments and outplacement costs are not deductible where the business completely ceases. See our article on termination procedure, notice and final pay for the employment side.
Need help with retrenchment payroll and tax?
If your company is planning a retrenchment and needs the package, CPF and tax reporting handled correctly, contact the Raffles Corporate Services team at [email protected] or on WhatsApp at +65 8501 7133. We can calculate the components of each package, run the final payroll and CPF submission, prepare Form IR8A or Form IR21, and reflect the payments correctly in the company’s tax computation.
Kevin Yeo, Raffles Corporate Services