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Comparison ยท Severance October 2026 · 4 min read

Redundancy Pay and How Much of it Survives Tax

Losing a job is expensive enough without the tax treatment making it worse. Some systems exempt a substantial slice of severance, others tax it as a single month's salary at the top of the scale.

Redundancy Pay and How Much of it Survives Tax

Severance pay sits awkwardly in every tax system. It is not really salary, because no work was done for it. It is not really compensation for injury, because the job ending was lawful. Different countries resolved that awkwardness differently, and the outcomes are far apart.

The four approaches

  • A tax free slice. The United Kingdom exempts the first 30,000 pounds of a genuine termination payment. Ireland has a basic exemption plus increases for service and pension position. Australia gives concessional treatment to a genuine redundancy payment up to a formula based limit.
  • Spreading relief. Germany applies the Fünftelregelung, which calculates tax as though the payment were spread over five years, substantially reducing the effect of progression.
  • Full taxation as income. The Netherlands, Denmark, Sweden and most of the Nordics tax severance as ordinary pay, with no special relief.
  • Pre-funded severance. Italy accrues TFR throughout employment and taxes it at an average rate calculated over the whole period, which is usually favourable. Covered in the Italian TFR.
Country Treatment of severance Practical effect
United Kingdom First 30,000 pounds exempt, balance taxed as income, no National Insurance on the exempt part A 45,000 pound package leaves 15,000 taxable
Ireland Basic exemption plus 765 per year of service, with an increased exemption and a standard capital superannuation benefit calculation Frequently exempts a large share for long service
Germany Fünftelregelung spreads the tax effect over five years Meaningful relief for large payments, no relief from the payment itself being income
Austria Abfertigung neu paid from a fund and taxed at a favourable flat rate One of the better outcomes in Europe
France Statutory redundancy indemnity exempt within limits, contractual excess taxed Negotiated settlements need care
Australia Genuine redundancy payment has a tax free base plus an amount per year of service Age and reason for leaving both matter
Netherlands Transition payment fully taxable as income No relief, though the payment itself is statutory
United States Severance is wages, subject to income tax and FICA No general exemption

The German fifths rule is worth understanding

The Fünftelregelung does not spread the payment over five years. It spreads the tax calculation. One fifth of the severance is added to your other income for the year, the additional tax on that fifth is calculated, and the result is multiplied by five.

Because the German rate schedule is progressive, taxing one fifth five times produces less than taxing the whole amount once. The relief is largest when your other income for the year is low, which means the timing of the payment matters. A severance received in January of a year in which you then work only a few months is taxed more favourably than the same amount received in December of a full working year.

What counts as severance in the first place

This is where most disputes arise. A termination package usually contains several elements and only some of them get the favourable treatment.

  1. Compensation for loss of employment. This is the part that qualifies for relief where relief exists.
  2. Pay in lieu of notice. Usually ordinary salary, taxed in full. The UK specifically legislated to prevent notice pay being dressed up as compensation.
  3. Accrued holiday pay. Always ordinary salary.
  4. Bonus or commission earned before leaving. Ordinary salary.
  5. Payment for a restrictive covenant. Taxable in full, and in some countries subject to social contributions as well.

A settlement agreement that allocates a large share to compensation and a small share to notice will be examined. The allocation has to be defensible, not merely stated.

Pension contributions as an exit route

In the United Kingdom and Ireland, directing part of a termination payment into a pension can avoid income tax on it entirely, subject to annual and lifetime limits. This is one of the few genuinely large planning opportunities available at the end of employment, and it needs to be agreed before the payment is made rather than after.

Similar logic applies in countries with deductible pension contributions, though the annual limits are usually lower. See salary sacrifice for the general mechanism.

Timing and residence

Severance paid after you have left the country is a treaty question. Most treaties allocate termination payments to the country where the employment was exercised, but the withholding often happens where the payroll sits. If you are leaving both a job and a country, the order of events changes the tax bill and the sequence should be deliberate.

The taxable portion of a severance payment is added to your income for the year. Enter your salary to the leaving date plus the taxable slice to see the real position, using the UK Salary Calculator or your own country page.

Written by OฤŸuz Yasin BaลŸ · last updated 25 Oct 2026

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