Taxation of Severance Pay in Spain

tributacion-indemnizacion-despido-espana

Severance pay is a payment made to an employee upon the termination of their employment. In Spain, severance pay is taxable, and the tax rate depends on various aspects.

Read our article and find out what is severance payment and how is it taxed.

What is severance pay?

Severance pay is available to employees in certain circumstances after the termination of their employment. The amount the employee receives usually depends on the length of their employment with the employer. Most companies have rules on severance pay in their employee handbooks.

Such payments offered by companies are usually paid as a lump sum and are tax-deductible. They usually include the employee’s normal salary plus some or all of the following benefits:

  • Special payments based on months or years of service.
  • Compensation for unused accrued holiday days, and sick days.
  • Medical, dental and life insurance.
  • Pension accounts and share options

History of severance payments in Spain

For centuries, workers in Spain have been protected against unfair dismissal by a series of laws and court rulings. These legal protections have helped to ensure that workers are treated fairly and receive compensation if they are unfairly dismissed from their jobs.

The history of severance pay in Spain dates back to the 14th century when the first laws were enacted to protect workers from unfair treatment by their employers. 

These early laws were designed to prevent employers from dismissing workers without just cause or adequate notice.

Over time, the laws governing severance pay in Spain have been expanded and clarified. In recent years, the courts have issued several important decisions that have further clarified the rights of workers who have been wrongfully dismissed from their jobs.

Calculation

When an employee is laid off in Spain, they are entitled to a severance payment known as the ‘indemnización por despido‘. The amount of this payment is calculated according to a formula based on the employee’s length of service and salary.

The ‘indemnización por despido’ is calculated as follows:

  • For every year of service, the employee is entitled to 1 month’s salary.
  • If the employee has been with the company for less than a year, they are entitled to 1 month’s salary.
  • The maximum amount that can be paid out in severance pay is 42 months’ worth of salary.
  • The minimum amount of severance pay an employee can receive in Spain is 20 days’ worth of wages for each year of service.

How is it taxed in Spain?

In Spain, severance pay is taxed as income from work. The first thing to do is calculate the taxable base, which is the gross amount of the severance pay, minus any deductions. The tax rate is then applied to the taxable base.

The deductions that can be made from the gross amount of severance pay include compulsory pension contributions, health insurance contributions, and unemployment insurance contributions. These deductions are made before the tax rate is applied.

The tax rate for severance pay in Spain is progressive, meaning that it increases as the taxable base increases. The highest tax rate is 45%, which applies to severance payments of €600,000 or more.

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Exceptions

There are several exceptions to this rule.

Employees who are dismissed for cause are also not eligible for compensation. This includes employees who have committed serious offences such as theft or fraud.

Finally, employees who voluntarily resign from their jobs are not eligible for compensation. This is because they have chosen to leave the company of their own free will and therefore cannot claim damages from the employer.

Conclusion

In conclusion, the taxation of severance payments in Spain is a complex issue that requires careful consideration. The Spanish government has taken steps to improve the tax treatment of severance payments, but there is still room for improvement.

Taxpayers should consult a tax advisor to ensure they take advantage of all available tax benefits. Contact our tax advisors in Barcelona for more details regarding this topic.

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