Tax authorities: no crackdown on severance pay – the safety net of lower tax rates remains in place
Under the new Consolidated Income Tax Act, which comes into force on 1 January, it remains possible to apply the IRPEF tax brackets and rates in force until 2026 if they are more favourable to the taxpayer
Key points
There are no plans to tighten taxation on severance pay (TFR). The safeguard allowing for the application of the most favourable tax regime, based on the tax brackets and rates in force as at 31 December 2026, will remain fully in force. This is clear from a careful reading of the new Consolidated Law on Income Tax (Legislative Decree 117/2026), which will come into force on 1 January 2027.
The lifebuoy remains
Article 21 of the Consolidated Act, in paragraph 11, sets out the safeguard clause already in force: ‘For the purposes of determining the personal income tax due on severance pay, equivalent allowances and other allowances and sums relating to the termination of employment, as referred to in Article 19(1)(a), the the tax rates and income brackets in force as at 31 December 2006 shall apply”. In essence, if, when calculating the tax on severance pay retained by the employer (as severance pay held in funds is subject to a substitute tax), the rates in force would result in a less favourable tax treatment, a safeguard still applies for the employee, allowing them to benefit from a lower tax rate.
The misunderstanding surrounding repeal
The perceived effect of the repeal of the safeguard provision had probably been determined, in the view of some observers, by the list (set out in Article 376) of the provisions intended to be superseded upon the entry into force of the new Consolidated Act, amongst which features precisely the ‘safeguard’ provision contained in Article 1, paragraph 9, of Law 296/2026 (the 2007 Finance Act). However, as mentioned, that provision is now fully incorporated into Article 21 of the new Consolidated Act, which deals with severance pay and end-of-service payments.
The clue behind the lack of revenue growth
After all, the technical report had not forecast any increase in revenue linked to the possible repeal of the safeguard. Such a repeal would have affected not low-to-middle incomes (which have been subject to tax bracket consolidation and rate reductions in recent years) but rather higher incomes with more substantial severance pay (TFR) amounts. But this is purely a hypothetical discussion, given that even in 2027 everything will remain as it is now.
