How the severance pay works: calculation, taxation and settlement

Since 1982 in Italy the severance pay , or the TFR , an emolument to which employees in the public and private sector are entitled. To make the right choices it is important to know how the severance pay is calculated , when it is possible to obtain the advance and if it is convenient to leave it in the company or invest it in a pension fund. Let’s see how the severance pay works in terms of calculation, taxation, advance and settlement.

Severance pay: what is the severance pay

The TFR is severance indemnity, a economic benefit recognized to employees as an additional emolument to the ordinary salary. All subordinate workers, employed with a permanent or fixed-term contract, including part-time workers are entitled to it. . The amount of the severance pay is linked to the salary of the worker, who each accrues a certain sum set aside by his employer.

It is in practice a deferred remuneration paid to the employee for each month of work , as it is not paid immediately but when the working relationship with the company is interrupted. Often the severance pay is also commonly called liquidation, indicating the payment of the severance indemnity by the employer, when making the liquidation of the severance pay based on the amount accrued by the worker until then.

Severance pay: when is it paid?

The severance pay is paid when the termination of the employment relationship , regardless of the motivation. This fee, in fact, is paid in all the following cases:

• dismissal of the worker;
• voluntary resignation of the employee;
• reaching retirement age.

In these circumstances the worker has the right to receive compensation accrued, therefore the employer must calculate the severance pay and pay when due to the employee. The revaluation of the severance pay takes place on an annual basis , taking into account a series of reference indices required by law. However, the sum is accrued monthly , so workers must receive the severance pay even if they have served for a period of less than 12 months.

How to calculate the severance pay

The calculation of the severance indemnity entails first of all the calculation of the annual salary , a value to be divided by a coefficient of 13.5 . Subsequently, the amount obtained is subject to the revaluation of the severance pay based on the inflation recorded during the year. To do this, specific indices are used, with a standard revaluation of 75% compared to the inflation recorded by Istat . To this sum, a fixed rate of 1.5% must then be added, thus obtaining the value of the employee severance indemnity.

Here is a practical example to better understand how the severance pay is calculated :

• we assume a gross annual salary of 20,000 euros;
• we divide the RAL of 20,000 euros by 13.5 obtaining a value of 1,481.48 euro;
• we calculate the overall revaluation index, using as a reference the fixed rate of 1.5% and the Istat revaluation coefficient of 3.8 of November 2021;
• we apply the revaluation index to the value of 1,481.48 euros obtaining a total revaluation of 64.44 euros;
• we add up the revaluations and we get a severance pay of 1,545.92 euros.

As eviden te, the severance indemnity provision is similar to a salary for each year worked , however it depends on the inflation recorded by Istat and on the amount of the gross annual salary, an amount that may vary over the years . For civil servants, from 1 May 2014 there is a ceiling for the RAL, in fact for the purposes of calculation of severance pay it is not possible to apply a gross annual salary exceeding 240 thousand euros.

Furthermore, for public employees , the system for calculating the severance pay is slightly different from that adopted for private employees. In this case, the amount is calculated considering a share of 6.91% with respect to the annual salary , obviously taking into account the revaluations. The total sum is reduced in the case of a split year, evaluating a whole month when at least 15 days in the month have been worked.

Returning to the previous example, in which the RAL was 20,000 euros a year, for the severance pay of public employees an amount of 1,382 euros is obtained by applying the 6.91% share. To this sum we must add the revaluation to inflation , obtaining also in this circumstance a value similar to that of the monthly salary. However, the amount varies from year to year , therefore the calculation must be made annually taking into account the various parameters to be used.

How does the taxation of severance pay

The payment of the severance pay is subject to taxation , in fact, the taxes required by law must be subtracted from the gross amount of the severance pay to obtain the net value. In this case, the taxation does not fall within the income tax dimension, so it cannot be combined, but a separate tax treatment is envisaged. In particular, the separate taxation is applied to the severance pay , considering the average rate for all years of service.

The financial portion of the severance pay provides for a taxation of 17% , applied to the revaluation sum based on the Istat coefficients and at the fixed rate. The remainder is taxed on the basis of how the severance pay is managed and requested. When the TFR is left in the company the total tax takes into account the total amount of the TFR accrued for each year of work, the reference income and the average rate.

If the TFR is invested in the supplementary pension funds, on the other hand, the TFR is taxed up to a maximum 15% , with the possibility of deducting an amount up to € 5,165 each year from the contributions paid to the pension fund. When the advance of the severance pay is requested, the taxation applied is as follows:

• rate of 23% for the purchase of the first home ;
• rate of 15%, with subtraction of 0.30% for each year of service after the 15th within a maximum of 6%, requesting the advance severance pay for medical expenses;
• rate of 15 %, with subtraction of 0.30% for each year of service after the 15th up to a maximum of 9%, requesting the TFR advance for personal reasons.

Procedures and timing of payment of severance pay

The TFR is paid every time the employment relationship between the employee and the employer ends. Obviously, in the event of a request for and obtaining an advance on the severance pay, this sum must be subtracted from the value paid by the company. The payment is made by the employer , according to different timing based on the category of workers, in fact the times depend on the collective agreement of reference, with prescription that occurs after 5 years in the absence of a specific request from the worker.

The liquidation of the severance pay for public employees it follows different procedures. First of all, the timing of payment of the severance pay depends on the reason that led to the termination of the employment relationship, according to the following options:

• within 105 days in the event of termination of service due to death or disability;
• after 12 months from ” interruption of the employment relationship in the event of the conclusion of the fixed-term contract, reaching the age limit or retirement;
• after 24 months from the end of the service in other cases, including voluntary resignation and dismissal.

For public employees, the severance indemnity is paid automatically, without the need for submit a request by the worker, in fact the request is carried out by their competent administration. Since 2014, the liquidation of the severance pay for public sector workers provides for the following methods:

• one-time payment up to 50 thousand euros;
• payment in two annual installments if the amount is between 50 thousand and 100 thousand euros, with the value of the first installment equal to 50 thousand euros;
• payment in three annual installments if the sum total is more than 100 thousand euros, with the first two installments amounting to 50 thousand euros and the third the remaining value.

When can an advance on severance pay be requested?

Employees can request the advance on severance pay , provided they have accrued at least 8 years of service with the same employer , to d in any case up to a maximum of 70% of the value of the severance indemnity accrued up to that moment. Anticipation of the severance pay can be requested for the purchase or construction of the first home, or to support medical expenses.

Advance severance pay without proof

The regulations provide for the possibility of requesting the advance of the severance pay even without giving reasons, however the amount is reduced 30% of the sum accrued by the worker up to that moment. In this case it is simply necessary to indicate in the request the indication “personal reasons”, in any case the employer could refuse to pay the sum, when the number of employees requesting the advance on severance pay exceeds 10% of the workforce entitled to this benefit, or 4% of the company’s total employees.

Is it possible to have the TFR in the pay slip?

From June 2018 it is no longer possible to request severance indemnity in the pay slip , receiving the payment of the economic service together with the salary. In Italy, a trial was started before this date, allowing this option to private sector workers employed for at least 6 months within the same company. Today this solution is no longer allowed, so you have to choose one of the available modes.

TFR: pension fund or leave it in the company?

The two options for an employee are leave the severance indemnity in the company or invest it in a pension fund . In fact, within six months of hiring, the worker must decide how to manage this emolument, joining a supplementary pension fund or keeping the amount accrued within the company. In the first case it is a choice that cannot be revoked , in the second one it is possible to decide later to allocate the severance indemnity to a fund c

When the severance pay is left in the company , if the company has fewer than 50 employees it is the employer responsible for the management of the emolument, while for activities with more than 50 employees the severance indemnity is automatically conferred to the INPS Treasury Fund . In this case, a tax of at least 23% is applied, making it unattractive to maintain the severance pay in the company nowadays, also considering the rather low mandatory minimum revaluation (1.5% fixed plus 75% of the detected inflation rate Istat).

Many employees in fact choose to join a pension fund , using the accrued severance pay to pay periodic contributions. This is a form of supplementary pension, with the possibility of receiving upon reaching the retirement age the payment of the capital in a lump sum or through an annuity. Furthermore, in pension funds the severance pay can be revalued to a greater extent than the legal minimum, in addition to benefiting from facilitated taxation , however it is essential to carefully choose the right funds with the support of an expert advisor.