B Law & Tax
17 April 2024

How is the severance pay taxed for income tax purposes?

The severance payment represents the settlement and payment of outstanding debts owed by the company to its employees at the end of the employment relationship, and is subject to personal income tax.

The severance payment condenses the company’s obligation to the employee at the end of the employment relationship, whether due to dismissal or voluntary resignation of the employee. It is paid regardless of the cause of termination, even in cases of disciplinary dismissal. The settlement consists of:

  • Salary still to be paid. That is, the salary that has not yet been paid to the worker up to the moment of termination.
  • Holidays not taken
  • Proportional part of the extraordinary payments
  • Unpaid bonuses and bonuses, unless otherwise specified in the contract.
  • Severance pay, if the termination of employment is the result of a dismissal. This compensation will be included with the severance pay in such cases.

Therefore, salary arrears, holidays not taken and bonuses make up the severance pay. All this income is income that is not exempt from personal income tax and wage items for which tax is payable.

All this income is included in the income from work, just like the salary received to date, and is taxed at the general IRPF rates as income from work. It is as simple as that. When you file your income tax return, your severance pay is considered part of your employment income, because that is exactly what it represents.

Moreover, the taxation of the severance pay means that the company must withhold the corresponding IRPF on outstanding wages, as well as on holidays not taken and other items in the severance pay, except for severance pay ((if conciliation has taken place).

As for where to include the severance pay in the income tax return, it should be included in section A of the income tax return referring to income from work.

Whether you receive your severance pay because you have changed companies or because you have lost your job and are going to become unemployed, bear in mind that you will have more than one payer on your tax return, which may affect your obligation to file personal income tax (IRPF). Specifically, in the exempt limit for filing your tax return, as it decreases from 22,000 euros to 15,000 euros if you have had more than two payers and have received 1,500 euros or more from the second and subsequent payers.

B Law & Tax International Tax & Legal Advisors.


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