TFR Severance Pay Italy: How It Works and Is Taxed
Editorial team Calcola Lordo Netto What Is TFR?
TFR (Trattamento di Fine Rapporto), commonly translated as "severance pay" or "end-of-service allowance", is a form of deferred compensation that every Italian employee accrues during their employment. Governed by Art. 2120 of the Italian Civil Code (Codice Civile), TFR is a mandatory benefit -- every employer must set aside a portion of the employee's gross annual salary each year.
Unlike severance pay in many other countries, TFR is not a penalty or compensation for termination. It is paid whenever the employment relationship ends, regardless of the reason: voluntary resignation, dismissal for cause, redundancy, mutual agreement, retirement, or end of a fixed-term contract. In essence, it functions as forced savings that the employee accumulates throughout their career with each employer.
For expats moving to Italy, TFR is one of the most distinctive features of the Italian employment system. It effectively reduces your immediate take-home pay (since the employer "retains" a portion of your gross salary as TFR) but provides a lump-sum payment when you eventually leave the job.
How TFR Accrues
The annual TFR accrual is determined by a straightforward formula defined in Art. 2120 of the Civil Code:
| Component | Formula / Value |
|---|---|
| Annual accrual | RAL ÷ 13.5 (approximately 7.41% of gross annual salary) |
| Annual revaluation | 1.5% fixed + 75% of ISTAT consumer price index (CPI) |
| INPS contribution deduction | 0.50% of RAL (deducted from annual accrual) |
The "RAL" used in this formula includes all regular compensation: base salary, the tredicesima (13th month), the quattordicesima (14th month) if applicable, and any other recurring pay elements defined by the CCNL. Overtime, bonuses, and expense reimbursements are generally excluded.
For example, an employee with a RAL of €35,000 accrues approximately €2,593 in TFR per year (€35,000 ÷ 13.5). After 10 years at this salary level, the accumulated TFR (before revaluation) would be roughly €25,930. With the annual revaluation applied each year to the previously accumulated balance, the total can be significantly higher, especially during periods of elevated inflation.
It is important to note that a 0.50% INPS contribution (contributo INPS al Fondo di Garanzia) is deducted from the annual TFR accrual, slightly reducing the net amount set aside. This contribution funds the INPS guarantee fund that pays employees' TFR if the employer becomes insolvent.
Company vs Pension Fund
When starting a new job in Italy, employees must make an important choice within their first six months: where to allocate their TFR. The two options are:
- Keep it with the employer (TFR in azienda): the employer retains the TFR as part of the company's balance sheet. The amount accrues and is revalued annually. For companies with more than 50 employees, the TFR is transferred to an INPS fund (Fondo di Tesoreria), but the effect for the employee is essentially the same. You receive the full accumulated amount when your employment ends.
- Allocate to a pension fund (fondo pensione): the TFR is transferred monthly to a complementary pension fund of your choice. The employee (and often the employer) can make additional voluntary contributions. The TFR becomes part of your supplementary retirement savings and is generally accessible only at retirement, with some exceptions.
| Feature | With Employer | Pension Fund |
|---|---|---|
| Accessibility | At employment end | Generally at retirement |
| Return | 1.5% + 75% of CPI | Market-dependent |
| Tax on payout | Separate taxation (avg. rate) | 15% (down to 9% after 15 yrs) |
| Advance request | After 8 years, up to 70% | After 8 years, up to 75% |
| Employer insolvency risk | Covered by INPS Guarantee Fund | Segregated from employer |
For expats who may not stay in Italy long-term, keeping TFR with the employer is often the more practical choice, since it provides liquidity when you leave the job. If you plan to build your career in Italy until retirement, the pension fund option typically offers better tax treatment on the final payout. If no explicit choice is made within six months of hiring, the TFR is automatically allocated to the employer's default pension fund (or the INPS fund for larger companies under the "silenzio-assenso" rule).
How TFR Is Taxed
TFR benefits from tassazione separata (separate taxation), a favourable regime that prevents the lump-sum payment from being piled onto your regular annual income and pushing you into higher IRPEF brackets. The mechanism works as follows:
- Determine the taxable TFR: the gross TFR accumulated (excluding annual revaluation, which is taxed separately) is the base.
- Calculate the average annual income: the Agenzia delle Entrate takes your total taxable income over the last 5 years and computes the average.
- Derive the average tax rate: IRPEF is calculated on this average income using the standard brackets, and the resulting amount is expressed as a percentage of the average income.
- Apply to TFR: this average percentage rate is applied to the taxable TFR amount.
The annual revaluation portion of TFR is taxed separately at a flat 17% substitute tax (imposta sostitutiva), which the employer withholds annually on the revaluation credited to the TFR fund.
For most employees, separate taxation results in an effective rate significantly lower than their marginal IRPEF bracket. For instance, an employee with an average taxable income of €30,000 over the last 5 years would have an average IRPEF rate of roughly 21-22%, compared to a marginal rate of 33% or 43% on their current income.
Use our TFR severance pay calculator to estimate the net amount you will receive based on your specific salary history and years of service.
TFR for Expats: Practical Considerations
For expats and foreign workers in Italy, TFR raises several unique questions — particularly around what happens when you leave the country, how cross-border taxation works, and how to actually claim your money after returning home.
What happens to your TFR if you leave Italy? Your TFR entitlement is tied to your employment relationship, not to your residency status. When you resign or your contract ends, your employer must pay out your accumulated TFR regardless of whether you remain in Italy or move abroad. The payment is typically made with your final payslip (ultima busta paga), within 30–45 days of the employment end date. If you have already relocated, the employer can transfer the net amount (after withholding tax) to any bank account you designate, including a foreign bank account. There is no legal requirement to maintain an Italian bank account to receive your TFR, although some employers may initially try to deposit it into the Italian account linked to your payroll. Make sure to provide your new banking details (including IBAN/SWIFT for international transfers) to your employer's HR department before your last day.
Cross-border taxation of TFR. TFR is classified as employment income for the purposes of international double taxation treaties. Under most of Italy's bilateral tax conventions (which follow the OECD Model Tax Convention), income from employment is taxable in the state where the employment was exercised. Since your TFR accrued while you were working in Italy, Italy retains the right to tax it — even if you have already moved to another country at the time of payment. The Italian employer will apply the standard separate taxation (tassazione separata) withholding when paying out the TFR. Whether you will also owe tax in your new country of residence depends on the specific double taxation treaty between Italy and that country. Most treaties include a mechanism to avoid double taxation, either through a tax credit in the residence country for Italian tax already paid, or through an exemption. For example, under the Italy-Germany double taxation convention (Art. 15), employment income is taxable in the state where the work was performed, so Germany would generally grant a credit for the Italian tax paid on TFR. Always check the specific treaty applicable to your situation (source: Agenzia delle Entrate — Convenzioni internazionali).
Claiming TFR after returning to your home country. If your employer does not pay TFR voluntarily (for example, due to financial difficulties or disputes), you have several options. First, you can send a formal demand letter (diffida e messa in mora) through a lawyer. If the employer still does not pay, you can file a claim with the Tribunale del Lavoro (Labour Court) in the jurisdiction where you worked. Italian labour courts are accessible to foreign workers even after they have left Italy, and proceedings can be conducted through a legal representative. The statute of limitations for TFR claims is 5 years from the end of the employment relationship (Art. 2948, comma 5, Codice Civile). If the employer is insolvent, you can claim from the INPS Guarantee Fund (Fondo di Garanzia) as described in the FAQ below. For practical purposes, it is advisable to keep copies of all your Italian employment documents (contratto di lavoro, buste paga, CU/Certificazione Unica) before leaving Italy, as these will be needed to support any future claim.
Practical example. Consider Katarina, a Croatian marketing manager who worked in Milan for 4 years with a RAL of €40,000. Her annual TFR accrual was approximately €2,963 (€40,000 ÷ 13.5). Over 4 years, she accumulated roughly €11,852 in gross TFR (before revaluation). When she resigns and moves back to Zagreb, her Italian employer pays out the TFR with separate taxation applied. Assuming an average IRPEF rate of approximately 20% based on her income history, the net TFR payout is around €9,482. Under the Italy-Croatia double taxation treaty, Croatia grants a credit for the Italian tax paid, so Katarina does not owe additional tax in Croatia on the same amount. The employer wires the net sum to her Croatian bank account within 40 days of her last working day (source: Normattiva — Codice Civile, Art. 2120).
TFR allocated to a pension fund — what if you leave Italy? If you directed your TFR to a complementary pension fund (fondo pensione), the situation is more complex. Pension fund assets are generally accessible only at retirement or under specific hardship conditions. However, if you permanently leave Italy and cease Italian employment, you may be entitled to request a full redemption (riscatto totale) of your pension fund position after 12 months of inactivity (no new contributions). The payout is subject to a substitute tax ranging from 15% down to 9%, depending on how many years you have been enrolled in the fund (the rate decreases by 0.30% for each year of participation beyond the 15th year, as per D.Lgs. 252/2005, Art. 14). This tax treatment is generally more favourable than the separate taxation applied to TFR kept with the employer, making the pension fund option attractive even for expats who may not retire in Italy — provided they are comfortable with the 12-month waiting period.