When it steps in
In insolvency proceedings, or when the employer cannot be subject to such proceedings and enforcement has failed.
CAF services · Employment
TFR severance pay in Italy
The TFR (trattamento di fine rapporto, Italian severance pay) builds up over your whole working life and is paid out in one go, with taxation that is not that of the year it arrives. Then, years later, the Agenzia delle Entrate (the Italian Revenue Agency) recalculates it and sends a letter that alarms almost everyone.
01 · How it builds up
How TFR severance pay builds up
The TFR is a deferred portion of pay: it accrues year by year and is paid out when the employment ends, whatever the reason: resignation, dismissal, retirement.
The annual amount is obtained by dividing the relevant pay by a divisor set by law; the accumulated fund is revalued every year by a mechanism made up of a fixed part and a part linked to the price index.
- The relevant pay includes all sums paid in connection with the employment, unless the contract provides otherwise.
- A contribution to the Fondo di garanzia (the INPS security fund for severance pay) is deducted from the annual amount.
- The revaluation applies to the fund as it stood on 31 December of the previous year and is subject to its own substitute tax.
- The TFR also accrues during protected periods of absence, such as maternity and sickness within the contractual limits.
- It is also due if you resign: it does not depend on the reason the employment ended.
- If the employee dies, it goes to the entitled persons under the rules of the Civil Code.
The TFR should not be confused with pay in lieu of notice or with an incentive to leave: these are separate sums, which may be paid together but follow their own tax rules.
02 · The mechanism
How it is taxed
The TFR is subject to separate taxation: it is not added to your other income for the year you receive it, because otherwise it would push up the tax rate of the person receiving it.
The average rate
A reference income is calculated by relating the TFR to the years of service, and the applicable average rate is set on that basis.
The employer's withholding
The employer applies that rate and pays over the withholding tax when the TFR is paid out.
The Agency's recalculation
Later, the Agency recalculates the tax using the average rate of the most recent tax years, and notifies the adjustment.
The result
It can show an amount owed or an amount due to you. In the first case you receive a payment request, in the second a refund.
The recalculation arrives years after the employment ends, and it is routinely mistaken for a tax assessment. It is not: it is the adjustment required by law, and its size depends on the comparison between the rate applied by the employer and the actual average rate for the reference period.
03 · The choice
Leaving it with the employer or paying it into a supplementary pension
It is the choice you make when you are hired, often without enough information, and it affects a significant sum.
| TFR kept by the employer | TFR paid into a pension fund | |
|---|---|---|
| Return | Statutory revaluation, predictable | Linked to the investment line chosen, variable |
| Risk | Very low | Depends on the line: from capital-protected to equities |
| Tax on returns | Substitute tax on the revaluation | Reduced rate on returns |
| Tax on the payout | Separate taxation with recalculation | Reduced rate that falls with the years of membership |
| Access | When employment ends, with advances under conditions | Locked in until retirement, with advances and early withdrawals |
| Employer's contribution | None | Provided by many contracts, if you contribute too |
The factor that tips the choice
It is not the return, it is the employer's contribution.
- Many contracts provide for an employer contribution if the employee pays in their own
- It is extra money you lose by leaving the TFR with the employer
- The final tax on the pension fund is lighter than on TFR kept by the employer
- In exchange, you accept that the money is locked in until retirement
04 · Before the end
When you can ask for an advance
The law allows you to request an advance on the TFR accrued, within limits on the amount and length of service, for specific needs.
- You need a minimum length of service with the same employer.
- The advance cannot exceed a percentage of the TFR accrued.
- The reasons allowed by law are exceptional medical expenses and buying a first home for yourself or your children.
- Collective agreements can extend the reasons and limits.
- The employer can grant requests up to an annual cap related to the number of employees.
- The advance can be requested only once during the employment, unless the contract is more favourable.
If you have paid your TFR into a pension fund, different and in some cases broader rules apply: advances are allowed for medical expenses, buying or renovating a first home, and a portion for other needs with no reason required, after a minimum period of membership.
05 · What to do
TFR severance pay in your tax return
The general rule is that it is not declared, because separate taxation is final. There are, however, situations where it is worth acting, or necessary.
- The TFR is not added to your other income and does not form part of your total income.
- It does not affect the calculation of tax credits and does not make you lose dependent family member status.
- It does count for the ISEE (the Italian indicator of household financial situation), where it goes into assets or income according to the DSU (the ISEE self-declaration) rules.
- If your total income is very low, it may be worth asking for ordinary taxation, if that is more favourable.
- The Certificazione Unica (the annual income statement from your employer) shows the TFR paid and the tax withheld, in a dedicated section.
- The Agency's adjustment arrives in a separate notice, not through the tax return.
06 · The security fund
When the employer does not pay
The TFR is protected by the Fondo di garanzia, a security fund run by the INPS (the Italian social security institute), which steps in when the employer is insolvent.
What it covers
The TFR and the last months of unpaid wages, within the set limits.
How to apply
By online application to the INPS, attaching the documents on the proceedings or the enforcement.
Timing
It is not quick: the application requires the proceedings to have reached a certain stage.
Taxation
TFR paid by the fund follows the same rules as TFR paid by the employer.
What to keep
Payslips, dismissal letter, TFR calculations: without documents the application stalls.
Frequently asked
The questions that keep coming up
I received a letter asking for more tax on my TFR. Is it a mistake?
Almost certainly not: it is the recalculation required by law. The Agency recalculates the tax on the TFR using the average rate for the reference years and adjusts it against what the employer withheld.
It is still worth checking the calculation, because it depends on the income declared in the reference years and on any advances already taxed. If the adjustment is due, you can ask to pay in instalments.
Should I leave my TFR with my employer?
It depends above all on one factor: if your contract provides for an employer contribution when you join the pension fund, leaving the TFR with the employer means giving up extra money.
On top of that there is the final taxation, which is lighter for supplementary pensions. In exchange, you accept that the money is locked in until retirement, with only the advances allowed.
I resigned. Am I still entitled to the TFR?
Yes. The TFR is due when employment ends, whatever the reason: resignation, dismissal, end of a fixed term, retirement.
It is deferred pay you have already earned, not a payment linked to the way the employment ends. The payment deadlines are those set by the applicable collective agreement.
Does the TFR count for the ISEE?
TFR received counts according to the DSU rules: if it has been paid out and sits in an account, it forms part of your financial assets at the reference date.
It is a point to consider when you apply for an ISEE-linked benefit in the year after the payout, because it can raise the indicator considerably.
Let's talk
The TFR recalculation letter is not a tax assessment
It is the adjustment required by law, and it arrives years later. Bring it to us: we check the calculation and see whether the amount is really due.