The TFRacronym for severance pay and also known as “liquidation”is a sum that is set aside monthly by the employer for each individual employee so that they can receive it at end of the employment relationshipregardless of whether it ends due to dismissal, resignation or retirement. It was introduced by Law no. 297/1982 and is governed by article 2120 of the Civil Code to guarantee workers an economic benefit when the employment relationship ends. The TFR is accrued every month, and we can monitor it in the pay slip; furthermore it is a tool that the employee can choose where to allocate: whether to keep it in the company and then receive it directly from the employer all together at the end of the relationship or at a pension fund and receive it with your pension, integrating what you will receive from INPS. The annual TFR provision amount is approximately equal to an additional salary per year: it is determined by taking the gross annual salary (RAL) and dividing it by 13.5, a fixed value to mediate those who receive the thirteenth salary and those who also receive the fourteenth salary by contract.
Where do we find the severance pay in the pay slip?
Every month, all employees receive the “pay slip”, a document full of information that tells the employee’s monthly work history: from hours of presence to hours of absence, from overtime to holidays, including details relating to compensation, taxes and contributions. This overview of data also includes those relating to severance pay (TFR). The presence of the severance pay in the pay slip is mandatory, but we do not always find it in the same place in the document. TFR information may be organized differently depending on the format used, with items that may appear in separate sections or be indicated individually, for example as “taxable TFR”, “month TFR accrual”, and similar.
How is TFR calculated?
The TFR is calculated on the basis of gross annual salarytherefore on the basis of how much we earn per year before counting how many taxes we will pay on those amounts, including bonuses and prizes, from which, however, a contribution to theINAIL of 0.5% (which is a sort of insurance that protects the worker against physical and economic damage resulting from accidents caused by work and occupational diseases).
The amount resulting from this calculation then goes multiplied by the years where you worked, and subsequently divided by 13.5as established by the Civil Code. Finally, to prevent the accrued sum intended for the worker from suffering a devaluation over time, a revaluation of 1.5% fixed and a variable of 75% of the increase in the consumer price index of families in the year is added previous based on what was declared by ISTAT.
Let’s see how much, for example, the gross TFR accrued by Leonardo, an employee, amounts to:
Leonardo’s gross annual salary (what is called RAL in the employment contract) is equal to €30,000 and he has already been working for 25 years, his Gross TFR accrued up to now is equal to €55,277; Let’s see how we got there:
- 30,000 – 150 (contribution that goes to INAIL) = 29,850
- 29,850 x 25 (years) = 746,250
- 746,250 ÷ 13.5 (fixed value) = €55,277 gross TFR
How is TFR taxed?
Once the amount of the gross TFR has been determined and the ISTAT revaluation has been added, to know the net amount it is necessary calculate the taxation of your severance paywhich depends on the reference income. The taxation of TFR occurs separately from ordinary income and depends on its destination: in fact, if the TFR remains in the company, it is taxed based on the Irpef rates (Income tax of natural persons, which is the tax owed by natural persons for the possession of some types of income) if instead it is allocated to a pension fund, the taxation is lower, between 9% and 15%.
Advance of severance pay
In certain situations, the worker can request an advance on severance pay, such as in the case of economic need, early retirement or purchase of a first home. The maximum amount that can be requested varies, ranging from 30% for personal reasons up to 70% of the TFR accumulated for the purchase of a first home. To request the advance the worker must also have carried out at least 8 years of service.
Payment of severance pay
TFR payment usually occurs at the end of the employment contract and, as we were saying, regardless of what the cause is. It can take place either in a single payment, therefore all together, or spread over the months and therefore in instalments, but the timing varies depending on the type of contract: a private worker is generally “liquidated” within 2 months of the end of the relationship, while an employee public after 12 months if he retires and 24 months in other cases, but in particular cases, such as incapacity, within 105 days of the end of the relationship.
Destination of TFR
A crucial aspect for the management of severance pay is the possibility for the employee to choose where to allocate the accrued annual fees, whether in a company or in a specific pension fund. Let’s remember that the private worker has time six months starting from hiring to declare where you intend to allocate your severance pay.
The purpose of joining a supplementary pension fund (commonly called pension fund) is to guarantee the worker the effective collection of the severance pay even before the risk that the employer turns out to be in defaulti.e. for example if perhaps the company for which he worked has used the sum that it had to set aside for the employee and is therefore unable to return it due to bankruptcy or other reasons.
It is good to know that there are agreements that allow the worker who joins a pension fund, also paying his own additional contribution to the severance pay into the fund, to receive a further contribution also by your employer. Furthermore, it is possible to choose to join a supplementary pension fund and have your TFR flow there as well at a later time and above all you can have both the TFR “maturing”or ask the company if it can pay that too “matured” until that moment.
TFR is an important tool economic protection for the worker. The management of severance pay, including options for advance and allocation to pension funds, can vary, so it is always advisable rely on the knowledge of experienced professionals and consultants and refer to the services of trade union organizations to receive assistance and advice, as well as to monitor the correct provision of severance pay.
