Severance pay received over several years cannot benefit from the 30% reduction

The application of tax benefits for receiving labor income on an irregular basis is a point of frequent interest for taxpayers who end their employment relationship through mutual agreement or early retirement schemes.

What the DGT has ruled

The Directorate General of Taxes (DGT) has clarified the interpretation of Article 18.2 of the Personal Income Tax Law (LIRPF) regarding severance pay. While amounts received through the mutual termination of an employment relationship are considered income obtained in a notoriously irregular manner, the regulations require a strict temporal requirement.

The criteria establish that the 30% reduction can only be applied when such income is imputed in a single tax period. In the event that the severance pay is received in installments over different years, the necessary legal precept to access this tax benefit is not met.

What this means for you

If you are a worker who has negotiated their departure from a company and the severance pay has been agreed to be paid in annual installments, the tax burden will be higher than you might expect. Since the 30% reduction cannot be applied to the total amount because it is not concentrated in a single tax year, the impact of IRPF on each payment will be higher.

This scenario directly affects the financial planning of those receiving deferred payments, as the irregular nature of the income does not compensate for the fact that the income is distributed over several tax periods.

What is advisable to do

When negotiating a contract termination, it is fundamental to analyze the payment structure. It should be assessed whether distributing the severance pay over several years, although it may offer different cash flow management, entails a higher tax cost by not allowing the reduction provided for in the LIRPF. Each contractual situation must be analyzed to determine the option that is most efficient from a tax perspective.