TFR in Italy: How Severance Pay Accrues, Is Taxed and Gets Paid
Trattamento di fine rapporto (TFR), literally "end-of-relationship treatment", is often described to foreign founders as a lump sum handed over when an employee leaves. That description misses the mechanism. TFR accrues from the first payslip of every subordinate employment relationship in Italy, whether the company incorporates as an S.r.l. or in another form, and it keeps growing on the company's books until the relationship ends, for whatever reason. A founder who treats it as a future one-time expense usually discovers, while scaling headcount, that it has been a running liability all along.
This article covers the mechanism: how the annual quota is worked out, when a company must start paying into a state fund, what a departing employee can do with the money, and how it is taxed. It skips general employment law and prints no calculator example: every figure below comes from the statute or regulator that sets it.
What TFR Is, and Who Actually Owes It
Article 2120 of the Civil Code states the rule without carving out any type of termination: "in ogni caso di cessazione del rapporto di lavoro subordinato, il prestatore di lavoro ha diritto ad un trattamento di fine rapporto" (in every case of termination of a subordinate employment relationship, the worker has a right to an end-of-service allowance). Resignation, dismissal, retirement and the expiry of a fixed-term contract all trigger the same right.
The right that survives every kind of termination
The obligation attaches to the fact of termination, not to its cause, so an employer cannot design around it by choosing how a relationship ends.
Who falls outside it: directors and the self-employed
The operative phrase is "rapporto di lavoro subordinato", a subordinate employment relationship. A director holding only an office-holder mandate, with no separate employment contract, sits outside that phrase, and so does a self-employed consultant. TFR follows the fact of being an employee, not of running or directing the company, a distinction worth fixing early in cross-border hiring.
- Accrues every pay period (each year's pay divided by 13.5)
- Revalued annually (1.5% fixed plus 75% of ISTAT inflation)
- Optional: an advance after 8 years, or routing to a pension fund instead
- Employer-size check: below 50 employees the company holds it, at 50 or more it goes to INPS
- Termination triggers the payout
- Taxed separately from ordinary income, backed by the guarantee fund if the employer cannot pay
How the Annual Quota Is Calculated and Revalued
TFR is not decided at the end of employment. It is built up year by year, and the formula is fixed rather than negotiated.
The accrual formula: pay divided by 13.5
Each year of service adds a quota "pari e comunque non superiore all'importo della retribuzione dovuta per l'anno stesso divisa per 13,5" (equal to, and in any case not exceeding, that year's pay divided by 13.5), under Article 2120. Roughly one-thirteenth-and-a-half of a year's gross pay is set aside as a new quota every year, before revaluation, fixed arithmetic that neither side can vary by agreement.
The revaluation formula: 1.5% fixed plus 75% of ISTAT inflation
The balance does not sit static. Article 2120 revalues it each year at "un tasso costituito dall'1,5 per cento in misura fissa e dal 75 per cento dell'aumento dell'indice dei prezzi al consumo" (a rate made up of 1.5% fixed plus 75% of the increase in the consumer price index), excluding that year's own new quota, so it compounds slowly over a long tenure.
Taking an Advance During Employment
An employee need not wait until the relationship ends to see any of the accrued balance. Article 2120 allows a request for an advance after at least eight years with the same employer, capped at 70% of the amount owed on the request date, for extraordinary medical expenses or a notarised first-home purchase, and only once during the relationship. An employer facing several requests in one year need not satisfy more than 10% of those entitled to ask, and any advance is deducted from the final settlement.
The 50-Employee Threshold and the Fondo di Tesoreria
Headcount changes who is actually holding the money, not whether the liability exists.
Below 50 employees: the company is the debtor
For a smaller employer, the accruing TFR sits as a liability on the company's own books for the whole life of the relationship. Nothing is paid out to a third party in the meantime, and the company remains the sole debtor of the balance until termination.
At 50 or more: the ordinary-course quota goes to INPS
Once a company employs at least 50 people, it must remit the ordinary-course TFR quota to the Fondo di Tesoreria (INPS Treasury Fund) rather than retain it, under the 2007 decree implementing Legge 296/2006, Article 1, commi 755-756: "il datore di lavoro che abbia alle proprie dipendenze almeno 50 addetti, è obbligato al versamento" (an employer with at least 50 employees is obliged to pay over). INPS then becomes the payer of that portion at termination, a shift worth planning for before headcount reaches the line.
Choosing a Pension Fund Instead of Leaving TFR With the Employer
TFR does not have to stay with the employer at all. Under Legislative Decree 252/2005, the framework governing forme pensionistiche complementari (complementary pension schemes), an employee can direct the accruing TFR into a pension fund instead, taking it outside both the employer's Article 2120 balance and the Fondo di Tesoreria from the moment it is allocated.
What changes for new hires from 1 July 2026
The Ministry of Labour's own portal confirms a new mechanism started that date: a silence-consent rule (silenzio-assenso) for allocating TFR to a pension fund for new private-sector hires, prepared "in vista dell'avvio, dal primo luglio 2026, del meccanismo di silenzio-assenso per il conferimento del TFR ai fondi pensione in caso di nuove assunzioni nel settore privato". The date and the mechanism are confirmed directly on the ministry's site; the exact number of days an employee has to choose before silence counts as consent is not independently confirmed against the amended statute, so no day-count is stated here.
How TFR Is Taxed, Now and at Payout
The 17% substitute tax on the annual revaluation
While TFR remains with the employer, the capital itself is not an annual tax event. The Agenzia delle Entrate confirms that a substitute tax applies "a carico del datore di lavoro..., delle imposte sui redditi nella misura del 17 per cento" (borne by the employer, at 17%), charged only on the annual revaluation, paid through Form F24, and does not apply to any portion already routed to a pension fund. The recurring compliance calendar it sits inside is the same one covered on our ongoing accounting support page.
Separate taxation at payout, and the EUR 1,000,000 ceiling
When TFR is finally paid, it is taxed under the separate-taxation regime (tassazione separata), computed by reference to the years the allowance accrued over rather than folded into that year's ordinary income. Above EUR 1,000,000, the Agenzia delle Entrate excludes the excess from separate taxation: it instead "concorre alla formazione del reddito complessivo" (contributes to the taxpayer's overall taxable income) under ordinary rules.
If the Employer Cannot Pay: the INPS Guarantee Fund
TFR is not a promise resting on one company's solvency alone. Legge 297/1982, Article 2, established a separate INPS guarantee fund, the Fondo di Garanzia, which "si sostituisce al datore di lavoro in caso di insolvenza del medesimo nel pagamento del trattamento di fine rapporto" (substitutes for the employer if it becomes insolvent before paying). It has been financed by a standing employer contribution of 0.03% of pay since 1 July 1982, a backstop unchanged in principle for over four decades.
| Figure | Value | Governing rule |
|---|---|---|
| Annual accrual divisor | 13.5 (each year's pay divided by 13.5) | Art. 2120 c.c. |
| Revaluation rate | 1.5% fixed plus 75% of ISTAT inflation, compounded annually | Art. 2120 c.c. |
| Minimum service for an advance | 8 years with the same employer | Art. 2120 c.c. |
| Advance cap | 70% of the amount accrued at the request date | Art. 2120 c.c. |
| Fondo di Tesoreria threshold | 50 or more employees | Legge 296/2006, Art. 1 commi 755-756 |
| Fondo di Garanzia employer contribution | 0.03% of pay, since 1 July 1982 | Legge 297/1982, Art. 2 |
| Substitute tax on revaluation | 17%, paid via Form F24 by the employer | Agenzia delle Entrate |
| Separate-taxation ceiling | EUR 1,000,000, excess reverts to ordinary taxation | Agenzia delle Entrate |
Every TFR rate and threshold on this page, with the article of law that sets it.
From our practice. TFR is the employer cost most often missing from a first-time founder's headcount plan, since it never shows up as a separate line on a payslip. Budgeting for it from the first hire, not the fiftieth, avoids the surprise: it accrues at the same rate regardless of company size, and headcount only changes who holds the money once the 50-employee line is crossed. Planning to hire through an Italian company? Tell us about your hiring plans and we can walk through what changes as the team grows.
Frequently Asked Questions
What is TFR?
A statutory end-of-service allowance every Italian employer owes an employee on termination of a subordinate employment relationship, whatever the reason for the termination. It is set out in Article 2120 of the Civil Code (R.D. 262/1942).
How is TFR calculated?
Each year of service adds a quota equal to that year's pay divided by 13.5. The running balance is then revalued every year at a rate of 1.5% fixed plus 75% of ISTAT consumer-price inflation (Art. 2120 c.c.).
Does TFR apply to a company director or a self-employed consultant?
No. The right attaches specifically to a rapporto di lavoro subordinato, a subordinate employment relationship. A director with no separate employment contract, or a self-employed contractor, falls outside Article 2120's own wording.
Can an employee draw part of their TFR before the relationship ends?
Yes, once only, after at least 8 years with the same employer, up to 70% of the amount accrued, for extraordinary medical expenses or a notarised first-home purchase (Art. 2120 c.c.).
What changes once an Italian company reaches 50 employees?
The employer must pay the ordinary-course TFR quota to the INPS Fondo di Tesoreria instead of keeping it on its own books, and INPS becomes the payer of that portion at termination (Legge 296/2006, Art. 1, commi 755-756).
Can TFR be sent to a pension fund instead of staying with the employer?
Yes, under the complementary-pension framework of D.Lgs. 252/2005. TFR allocated to a pension fund sits outside the employer's Article 2120 balance and outside the Fondo di Tesoreria described earlier on this page.
What changed for new hires from 1 July 2026?
The Ministry of Labour confirms a new silence-consent mechanism for allocating TFR to pension funds began that date for new private-sector hires. The exact choice-window length is not yet confirmed against the amended statute and is not stated here.
Is TFR taxed while it is still accruing?
The capital itself is not. A 17% substitute tax applies only to the annual revaluation, paid by the employer through Form F24, and does not apply to any portion already sent to a pension fund (Agenzia delle Entrate).
How is TFR taxed when it is finally paid out?
Separately from ordinary income (tassazione separata), calculated with reference to the years it accrued over rather than the payout year's marginal rate. Above EUR 1,000,000, the excess reverts to ordinary taxation (Agenzia delle Entrate).
What happens to unpaid TFR if the employer becomes insolvent?
The INPS Fondo di Garanzia substitutes for the insolvent employer and pays the outstanding balance, funded by a standing employer contribution of 0.03% of pay in place since 1 July 1982 (Legge 297/1982, Art. 2).