Did you know that retrenchment packages form part of gross income and are subject to income tax like all other income?


A retrenchment package is a pay off by an employer to an employee who has been laid off due to restructuring that has rendered the employee’s position redundant. It constitutes pecuniary payment or the offer of material benefits. A retrenchment package may include any or all of the following,  severance pay (cash), gratuity (cash) and other material benefits like motor vehicles, vehicles, computers, furniture and immovable property (houses and buildings).

Legal Provision

Section 8 (1) of the Income Tax Act (Chapter 23:06) defines what constitutes “gross income” and retrenchment packages are brought into taxation under this section.  Section 73 of the same Act provides for the payment of employees tax (including tax on retrenchment packages) withheld by employers.


Section 14 of the Income Tax At (Chapter 23:06) as read with paragraph 4 (p) of the Third Schedule to the same Act exempts the greater of US$5,000 or one third of up to US$45,000 of the amount of any severance pay, gratuity or similar benefit received on cessation of employment due to retrenchment, under a scheme approved by the Minister responsible for labour. The amount determined as legislated will thus not be liable to tax or in other words, will be excluded from the taxable income.

Application of a Tax Deduction Directive

On termination of employment an employer determines the respective retrenchment package and applies to ZIMRA for a tax deduction directive in form NP4. The following information, in respect of the employee receiving the retrenchment package, should be carefully and accurately filled by the employer onto the application form:

  • First name and surname
  • National identity number (which acts as the taxpayer identification number, TIN)
  • Tax year (the period in which the retrenchment accrued or is paid)
  • Nature of benefit
  • Amount of benefit (based on the open market value of the benefit or property offered as retrenchment)
  • Salary and allowance per annum


The application form should be signed by both the employer or his representative and the employee. Where the employee is unable to sign the application form, the employer should indicate this to ZIMRA and may sign on behalf of the employee. The completed application form should then be submitted to ZIMRA for processing.

On receipt of the application from the employer, ZIMRA will check the correctness and accuracy of the information on the form and its accompanying attachments before issuing the directive.


Computation Of Tax On Retrenchment Package

Below is an example of the computation in respect of taxation of retrenchment packages:

Total package                                                                       xxxxxx

Less relocation allowance                                                    (xxxx)

Less exempt portion                                                             (xxxx)

Add annual salary at date of withdrawal                            xxxxxx

Taxable income                                                                    xxxxxx


Tax thereon at normal rates                                                  xxxxxx

Less tax on salary at normal rates                                        (xxxx)

Add 3% Aids levy                                                               xxxxxx

Tax applicable on retrenchment package                             xxxxxx

Payment due dates

Once a directive has been issued, the employer should remit the employees tax within the period stipulated in the 13th Schedule of the Income Tax Act.  Failure to withhold and late remittances/payments of employees’ tax constitutes an offence and attracts penalties and interest.

Our valued clients are hereby informed that no fee is charged for the issuance of tax directives and are encouraged to report to the police any incidents of people purporting to be ZIMRA officers and charging any fees and  involved in such corrupt practices.