Severance pay for objective dismissal will have an exemption limit of 180,000 euros

The tax treatment of severance pay received following the termination of an employment contract often raises doubts, especially when the agreed amount exceeds the legal minimums. The Dirección General de Tributos (DGT) has specified the scope of the exemption applicable in cases of dismissal for objective causes.

What the DGT has resolved

The tax authority establishes that, in dismissals motivated by objective causes, the portion of the severance pay that is exempt from Personal Income Tax (IRPF) is that which does not exceed the mandatory limits established in the Workers' Statute for unfair dismissal. Furthermore, this exemption has a maximum cap of 180,000 euros.

Any amount that exceeds both limits—the unfair dismissal limit or the 180,000 euro cap—will be considered employment income and must be taxed in full. In these cases of excess, the taxpayer may apply the 30 percent reduction if the period of generation of said income is greater than two years.

Regarding fractional payments, the DGT points out that the 30 percent reduction will only be applicable if the quotient between the years of service and the payment periods is greater than two.

What this means for you

If you are a worker receiving severance pay for objective dismissal, not all the amount received will be tax-free. You must identify which part of your compensation fits within the legal limits for unfair dismissal and whether this sum is less than 180,000 euros to determine the exempt amount.

For companies, this criterion implies the need to correctly apply these limits at the time of settling severance payments, ensuring that the withholding and the declaration of the taxable portion comply with the provisions of the IRPF Law and the Workers' Statute.

What should be done

It is necessary to analyze the composition of the severance pay received and verify whether the excess over the legal limits allows for the application of the reduction for irregular income. Since the calculation depends on the relationship between the years of service and the frequency of payment, it is recommended to assess each situation individually to determine the real tax impact.