What is Code 3901 on a South African IRP5?
Retrenchment lump sum severance benefits explained — how SARS taxes code 3901 using the special lump sum table, the BCEA minimum, and what appears on your IRP5 after retrenchment.
3901Code 3901 is the severance benefit paid to you on retrenchment. It is the lump sum your employer pays when your employment is terminated due to operational requirements, insolvency, or the employer ceasing to trade. Unlike your notice pay or leave payout (which are taxed as ordinary income under code 3601), the code 3901 amount is taxed using the special retirement lump sum tax table — with the first R550,000 of cumulative lifetime benefits taxed at 0%.
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What Code 3901 Means
Code 3901 records a "severance benefit" as defined in Section 1 of the Income Tax Act. A severance benefit is the lump sum your employer pays when your employment is terminated due to:
- The employer's operational requirements — redundancy, restructuring, or downsizing (commonly called retrenchment)
- The employer ceasing to carry on trade — closing the business
- The employer being wound up or sequestrated — insolvency or liquidation
Code 3901 appears on your IRP5 certificate at the end of the tax year, not on your monthly payslip. It is separate from your notice pay, accrued leave payout, and any garden leave — those are taxed as ordinary income under code 3601 and appear as separate IRP5 line items. Code 3901 is specifically and only the severance component.
How Code 3901 Is Taxed
Severance benefits are not taxed at your normal marginal PAYE rate. They are taxed separately using the retirement lump sum tax table (the Second Schedule to the Income Tax Act). This is the same table used for retirement fund lump sums, and the two pools are tracked cumulatively across your lifetime by SARS.
| Cumulative Lifetime Benefits | Rate | Tax on This Portion |
|---|---|---|
| R0 – R550,000 | 0% | R0 |
| R550,001 – R770,000 | 18% | Up to R39,600 |
| R770,001 – R1,155,000 | 27% | Up to R103,950 |
| Above R1,155,000 | 36% | 36c per rand above |
The R550,000 zero-rate threshold is a cumulative lifetime amount, not a per-retrenchment amount. If you previously received a retirement fund lump sum (e.g., from cashing out a pension fund on resignation before March 2009) or a previous severance benefit, those amounts reduce the remaining zero-rate band available to you. Your employer deducts tax based on a directive from SARS that takes your cumulative history into account.
Code 3901 Worked Examples
| Scenario | Code 3901 Amount | Prior Benefits Used | Tax on 3901 |
|---|---|---|---|
| First-ever retrenchment, modest payout | R200,000 | R0 | R0 (within R550,000) |
| First-ever retrenchment, larger payout | R700,000 | R0 | R27,000 (18% on R150,000 above R550,000) |
| Second retrenchment, first used R300,000 | R400,000 | R300,000 | R27,000 (18% on R150,000 above remaining R250,000 zero-rate) |
| Zero-rate band fully used in prior events | R300,000 | R550,000+ | R54,000 (18% on full R300,000) |
BCEA Minimum Severance Pay
Before code 3901 can be applied, the employer must first determine the correct amount. The Basic Conditions of Employment Act (BCEA) sets a statutory minimum: one week's remuneration for every completed year of continuous service with that employer. This is a floor — your employment contract or a negotiated retrenchment package may provide more.
The BCEA minimum is based on your regular weekly remuneration — your basic salary plus any fixed recurring allowances that form part of your normal pay. It excludes reimbursements, overtime, and non-contractual bonuses. If your package is more complex, use the PayTools Retrenchment Calculator to check the minimum amount your employer is required to pay before reviewing your code 3901 IRP5 entry.
What Is Not Included in Code 3901
Several payments made at the same time as retrenchment are taxed differently and appear under other IRP5 codes:
- Notice pay — taxed as ordinary income under code 3601, even if paid as a lump sum in lieu of notice
- Accrued leave payout — taxed as ordinary income under code 3601
- Garden leave salary — taxed as ordinary income under code 3601
- Restraint of trade payments — taxed under code 3613
- UIF benefits — not an IRP5 item; paid separately by the Department of Employment and Labour and not subject to income tax
Frequently Asked Questions
What does code 3901 mean on my IRP5?
Code 3901 is the severance benefit you received on retrenchment. A severance benefit is the lump sum paid when your employment is terminated due to your employer's operational requirements (redundancy), when the employer ceases to carry on trade, or when the employer is wound up or sequestrated. It is not your notice pay or accrued leave — those are recorded under other codes as normal income. Code 3901 is taxed at the special retirement lump sum rates under the Second Schedule of the Income Tax Act, not at ordinary PAYE rates.
How is a severance benefit taxed in South Africa?
A severance benefit under code 3901 is taxed using the special retirement lump sum tax table, not the standard PAYE tax tables. For the 2025/2026 tax year, the rates are: 0% on the first R550,000 of cumulative benefits, 18% on R550,001 to R770,000, 27% on R770,001 to R1,155,000, and 36% on amounts above R1,155,000. These rates are cumulative across your lifetime — any previous severance benefits or retirement fund lump sums you have already received will count against the zero-rate threshold.
What is the minimum severance pay in South Africa?
The Basic Conditions of Employment Act (BCEA) sets the minimum severance pay at one week's remuneration for every completed year of continuous service with the employer. This is a statutory minimum — your employer may pay more if specified in your employment contract or a retrenchment agreement. The BCEA minimum is calculated on your regular weekly remuneration, which includes the basic salary but excludes certain allowances unless they are a fixed regular part of your pay.
Does code 3901 include my notice pay and accrued leave?
No. Notice pay and accrued leave payout are normal income taxed under code 3601 at ordinary PAYE rates. Code 3901 is only the severance benefit itself — the lump sum paid specifically because your employment was terminated due to operational requirements. On your final IRP5, you may therefore see both code 3601 (for notice pay and leave) and code 3901 (for the severance benefit) as separate line items.
Does previous retrenchment or retirement affect my tax rate on code 3901?
Yes. SARS tracks cumulative severance benefits and retirement lump sums across your lifetime. If you previously received a retirement fund lump sum or a severance benefit, the zero-rate R550,000 threshold will already be partially or fully used. Your employer submits your IRP5 with the code 3901 amount and SARS applies the correct cumulative rate when assessing your annual tax return. This means employees who have previously been retrenched or taken early retirement may pay more tax on a subsequent severance benefit.
Is a severance benefit the same as UIF?
No. Code 3901 is a severance benefit paid by your employer on termination of employment. UIF (Unemployment Insurance Fund) is a separate state benefit administered by the Department of Employment and Labour — it is paid from the fund you contributed to monthly at 1% of salary. You can claim both your code 3901 severance benefit from your employer and your UIF benefits from the Department of Labour after retrenchment; they are independent entitlements.