In Italy, the legal required severance pay is called Trattamento di Fine Rapporto (TFR). Every employer is required to set aside a severance payment (TFR) for the employees, and it is paid to the employees when they leave the company.
How is it calculated?
To be able to calculate TFR, employers must have access to employees’ history.
1.The calculation goes by employee’s gross annual salary divided by 13.5 (this is the agreed amount for employees who receive 13 or 14 instalments yearly).
2. From that result you deduct the taxable income that regards INPS (Italian Social Security / pension agency) multiplied by 0.5%.
3. The TFR is then increased according to a percentage that is communicated by ISTAT (the National Statistical Institute).
From the employer’s perspective, the effective yearly accrual of TFR is 7.41% (100/13.5) of the total amount of the salaries of the employees.
Is TFR paid in the payslip?
Certain employees have the option to request their employer to pay the amount accrued to INPS or qualifying regulated pension scheme. This is a personal choice of the employee which normally depend on different criteria’s such as contributions to occupational or private sector pension schemes, possibility of higher yield on sums invested, security of the fund and taxation.
Employees in the private sector have the option to receive the TFR advance payment monthly via payroll. This option can also be exercised by employees who have previously chosen for their TFR to be paid into supplementary pension fund. The TFR paid via payroll is taxed according to the ordinary income tax scale rates and therefore at potentially a higher amount that the rate applicable to TFR paid out on termination of employment.
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