Is redundancy tax free?

Is redundancy tax free?

Unfair dismissal

The worker has claimed the dismissal and we have reached an agreement to pay her an additional amount in order to avoid the lawsuit, but it will be paid only for that purpose, maintaining in full the causes of the dismissal and therefore, without recognizing the unfairness of the dismissal.

Without prejudice to the provisions of the preceding paragraph, in the cases of collective dismissals carried out in accordance with the provisions of Article 51 of the Workers’ Statute, or produced by the causes foreseen in letter c) of Article 52 of the aforementioned Statute, provided that, in both cases, they are due to economic, technical, organizational, production or force majeure causes, the part of the compensation received that does not exceed the limits established as mandatory in the aforementioned Statute for the unfair dismissal will be exempt.

For these purposes, the total amount of earned income to be computed will be determined by the arithmetic sum of the aforementioned earned income from the company itself or from other companies in the group of companies in which the circumstances set forth in Article 42 of the Commercial Code are met, regardless of the tax period to which each income is attributed.”

Calculation of unfair dismissal

For one thing you must be clear: you must include severance pay in your income tax return (as long as it does not meet certain requirements). Knowing how to do it and when it is mandatory can make the difference.

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Severance payments are taxed on your income tax return as part of your earned income. That is to say, they are added to your salary and the unemployment you receive to pay taxes in the general base of the IRPF.

Fortunately, these compensations are also exempt in the IRPF as long as they meet certain requirements. In these cases, the money paid to you by the company when you are fired will not have to be included in your income tax return and you will not pay taxes on it either.

The severance payment and the severance pay are two different concepts. The first one is the sum of the amounts that the company owes you in concept of salary and vacations not enjoyed, among other things. This money is not exempt from IRPF taxation, as is the case with severance pay.

Unless you have been unemployed for two months or less, it is very easy for you to have to make the income tax return, which you may also have to pay. The SEPE hardly applies IRPF withholding on the unemployment benefit and that affects the result of the income tax, increasing the possibilities of paying it.

Irregular income from severance pay

when the severance payment is divided into two or more tax periods, it will be subject to effective taxation for the Tax from the moment that its accumulated amount exceeds the amount that is exempt under the provisions of article 7.e) of the LIRPF. Once this amount is exceeded, only the 30% reduction may be applied.

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Likewise, if applicable, the limit established for the case of termination of labor or mercantile relationships in which the amount of earned income derived from the termination exceeds 700,000 euros must also be taken into account.

“(e) Severance payments for dismissal or termination of the employee, in the amount established on a mandatory basis in the Workers’ Statute, in its implementing regulations or, as the case may be, in the regulations governing the enforcement of judgments, without the amount established by virtue of an agreement, pact or contract being considered as such.

Without prejudice to the provisions of the previous paragraph, in the cases of collective dismissals carried out in accordance with the provisions of Article 51 of the Workers’ Statute, or produced by the causes foreseen in letter c) of Article 52 of the aforementioned Statute, provided that, in both cases, they are due to economic, technical, organizational, production or force majeure causes, the part of the compensation received that does not exceed the limits established with obligatory character in the aforementioned Statute for unfair dismissal will be exempt.

Compensation for unfair dismissal

Fortunately, severance payments are exempt from income tax provided they meet certain criteria. In other words, this money will not have to be added to the rest of the income when it is time to make the IRPF 2020 tax return.

Non-exempt severance payments are considered as earned income. In other words, they will be added to your salary, the unemployment that you will receive later (yes, unemployment is not tax exempt) and even the money from your pension plan when you redeem it.

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For the Treasury that compensation is as if you had earned more money. The box of the 2020 income tax return in which to put the severance pay when it is taxed is in section A, destined to the income from work.