Severance pay by mutual agreement may qualify for the 30% Personal Income Tax (IRPF) reduction

The legal nature of economic compensation received following the termination of an employment relationship has raised doubts regarding its tax treatment. Recently, the Dirección General de Tributos (DGT) has clarified whether amounts received through the resolution of a contract by mutual agreement can benefit from the reduction provided for irregular income.

What the DGT has ruled

The advisory body has determined that severance pay for the resolution of an employment relationship by mutual agreement has the nature of employment income. As these are earnings that are not received on a regular basis, they are considered to be obtained in a notoriously irregular manner over time.

Consequently, the DGT establishes that it is possible to apply the 30% reduction contemplated in Article 18.2 of the Personal Income Tax Law (LIRPF). For this tax benefit to be applicable, the requirement must be met that such income is reported in a single tax period.

What this means for you

If you are a worker who decides to end your employment relationship through a mutual agreement with the company, the amount you receive as economic compensation will not be taxed at its full value without benefits. Being classified as irregular income, you have the possibility of reducing the taxable base of that income by 30%.

This criterion is relevant for tax planning in the year the severance is received, as it allows for the mitigation of the tax impact on an amount that, due to its volume, could increase the effective tax rate.

What you should do

It is essential to verify that the entire severance payment is received and declared within the same calendar year to avoid losing the right to the reduction. Since the application of this benefit depends on the correct classification of the nature of the income and its temporal reporting, each situation must be assessed individually to ensure compliance with current regulations.