Severance pay for termination of employment may be exempt up to 180,000 euros

The tax treatment of amounts received following the termination of an employment relationship frequently raises doubts, especially regarding the application of exemptions and seniority reductions. The Dirección General de Tributos (DGT) has recently clarified how these amounts should be taxed under Personal Income Tax (IRPF).

What the DGT has ruled

The administration has clarified that severance pay for the termination of an employment relationship, in accordance with Article 50 of the Workers' Statute, is subject to a specific exemption regime. The limit of said exemption shall be the lesser of two values:

• The amount that is mandatory due to unfair dismissal.
• The amount of 180,000 euros.

Any excess over these limits will be considered employment income and will be subject to taxation. Likewise, a 30% reduction provided for in Article 18.2 of the IRPF Law may be applied to that excess, provided that the period of generation of said income is greater than two years. On the other hand, the DGT specifies that the payment of unused vacation days does not constitute an exempt severance payment, but is instead classified as employment income, without the possibility of applying the seniority reduction since it does not have a generation period exceeding two years.

What this means for you

If you are a worker receiving an amount due to the termination of your contract, the tax impact will depend strictly on the nature of the concept received. Not all amounts received upon the termination of an employment relationship enjoy the same tax benefit. While severance pay for dismissal has a considerable exemption margin, other concepts such as unused vacation days will be taxed in full as employment income.

What you should do

It is essential to verify the detailed composition of the settlement received to distinguish which part corresponds to severance pay and which part to other salary concepts. Since the calculation of the exemption depends on the comparison between the mandatory amount and the 180,000 euro limit, it is necessary to have the documentation that proves the reason for the termination and the calculation of the severance pay to ensure that the withholding and the tax return are correct. It is recommended to assess each particular situation to determine whether the seniority requirements for the 30% reduction are met.