TFR in Italy: How is it calculated and when is it paid?

In Italy a severance package is paid to all employees, whether they are in the private or public sector.

Regulated since 1982, tax on severance pay can be one of the most confusing items on your final payslip.

So knowing how to calculate severance pay, and how you’ll be taxed, is crucial to avoid any unpleasant surprises. We’ll explain, in the simplest way possible, how severance pay is calculated and how severance tax works.

Severance pay is a benefit granted to all employees, which is added to the base remuneration they accrue for each month of work. It’s referred to as deferred remuneration, i.e. a financial benefit that’s paid only at the end of the employment relationship, with the last payslip.

The benefit applies to all types of employees (part-time, full-time, fixed-term or open-ended contract), as long as they are employed by a public or private company. The amount accrued is set aside and then paid out at the end of the employment relationship.

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As mentioned above, severance pay is paid out at the end of the employment relationship, i.e. when the employee stops working for the company or public organization with which they had an employment contract.

Employment relationships end for various reasons: company layoffs, resignation, or simply reaching retirement age. So it’s a good idea to understand how severance pay is taxed and the various options available to employees.

During the employment relationship, employees can decide whether to keep their severance pay within the company, deposit it in a pension fund or, in some cases, even request an advance on the amount. 

We said that the severance package is added to your salary in your final payslip, or paid out at the end of the employment relationship. But the amount is subject to separate tax, which takes into account the average rate during your period of employment.

To get a better understanding of how much tax is taken from severance pay, let’s look at the choices available to employees.

If an employee decides to leave the amount in the company, the tax rate is 17%, which may go up to more than 23% in companies with more than 50 employees, since the amount is transferred to the INPS Treasury Fund.

But if an employee opts to invest in pension funds, the maximum tax rate on the severance package is 15%. The situation is different though for those requesting advance severance payments, as there are a number of conditions to be met, as we’ll discuss below.

Employees requesting advances will be subject to the following severance tax rates:

• Tax at 23% if the amount is requested for a first home purchase
• If requested for medical expenses, 15% minus 0.30% each year after the 15th year of service, up to a maximum of 6%
• If requested for personal reasons, 15% minus 0.30% each year after the 15th year of service, up to a maximum of 9%

What about the requirements for requesting advance severance pay?

Advances on severance pay may be helpful for those who, after several years of service, need a large sum of money in a relatively short time.

The employee must have gained at least 8 years’ seniority with the same organization or company to be able to request an advance on severance pay. The amount requested can also not be more than 70% of their total accrued severance package.

In cases of emergency, the employee may even request severance pay without a specific purpose (i.e. for personal reasons), up to 30% of the accrued amount.

However, the employer may decide not to grant the advance on severance pay, particularly when an advance is requested by more than 4% of the company’s employees.

If the advance is approved, the employee will receive the remaining balance at the end of their employment (less the amount already advanced).

Let’s look at how to calculate TFR, to see how much is being set aside over the year, and decide whether to keep it in the company, deposit it in a pension fund or, if necessary, request it in advance.

The process is different from that used to calculate gross and net salary or the year-end bonus, and the calculation varies depending on the type of employer (public or private).

Private employees can calculate their severance pay by first finding their gross annual salary. This amount is then divided by 13.5, applying a fixed rate of 1.5% after the first year and a 75% adjustment for ISTAT inflation.

Here’s a practical example explaining how to calculate your severance pay.

Mark is a private employee and after his first year of work, he received a gross annual salary of €35,000. This amount will be divided by 13.5.

Mark’s severance pay → 35,000 ÷ 13.5 = €2,592.59

Assuming that Mark receives his salary over 14 monthly payments, we can see that the severance pay he accrued in one year is very close to his gross pay, in this case €2,500 (35,000 ÷ 14).

The following year, Mark again receives a gross annual salary of €35,000, but as of now, the above-mentioned indexes will apply. Assuming that the ISTAT inflation index during the year was 5%, this gives us 3.75% (from 75% of 5%). We then add the fixed rate of 1.5%.

So Mark’s severance pay for his second year of employment will be:

Mark’s severance pay → 35,000 ÷ 13.5 = €2,592.59

Severance pay adjustment → 2,592.59 x 5.25% [1.5% + 3.75% (5% x 75%)] = €136.11

Total severance pay accrued in 2 years → 2,592.59 + 2,592.59 + 136.11 = 5,321.29 

It’s also worth noting that, for those working in the public sector, the calculation of severance pay takes into account the 6.91% share of the gross annual salary, still applying the ISTAT adjustment. In this case, the non-adjusted severance benefit will be €2,418.50, which is similar to the gross monthly salary.

Based on these calculations, employees can create effective strategies to manage their finances, such as the 50/30/20 rule and reach their savings goals with peace of mind.

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To make things even easier, you’ll also have the option of creating Spaces, separate from your main account, giving you a dedicated place to deposit your advance on severance pay!

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