Severance Pay Taxes and Tax-Saving Strategies: What You Must Check Before Receiving

Understanding Severance Pay and Taxes: Reducing Losses Through Knowledge

Many office workers preparing for retirement are curious about the severance pay they will receive, but often receive it without properly understanding the tax structure. Severance pay is not simply an amount you receive but rather income subject to multiple complex taxes, so it's important to understand it accurately beforehand. Based on 2026 standards, let's explore the tax system applied to severance pay and the actual calculation methods.

Retirement Income Tax Calculation System

The taxes imposed on severance pay are broadly divided into retirement income tax and local income tax. Retirement income tax applies a separate tax calculation method different from regular salary, and you can choose between 'separate taxation' or 'combined taxation'.

Retirement income tax is calculated as follows. First, retirement income deduction is subtracted from your severance pay. This is applied on a graduated basis depending on your length of service. As of 2026, you receive a deduction of 2.5 million won per year (maximum 100 million won). For example, an employee with 20 years of service receives a 50 million won deduction. The amount remaining after deduction becomes the taxable amount.

A five-tier progressive tax rate is applied to the taxable amount after deduction. Up to 12 million won is taxed at 6%, 12 million won to 46 million won at 15%, 46 million won to 88 million won at 24%, 88 million won to 150 million won at 35%, and over 150 million won at 40%.

Calculating Severance Pay Taxes Through Real Examples

Let's understand through a concrete example. If an employee with 50 million won in severance pay worked for 15 years, first subtract the retirement income deduction of 37.5 million won (2.5 million won × 15 years). The taxable amount becomes 12.5 million won. Since a 6% tax rate applies to this amount, the retirement income tax is 750,000 won.

Local income tax of 10% is additionally applied. Local income tax is 10% of the retirement income tax, so 750,000 won × 10% = 75,000 won. Therefore, the total tax is approximately 825,000 won, and the actual amount received is 49.175 million won. This means only about 1.6% in taxes is applied.

However, the tax burden increases significantly when severance pay is large. If severance pay is 200 million won with 25 years of service, after subtracting the deduction of 62.5 million won, 137.5 million won becomes taxable. In this case, with multiple tax brackets applied, the total retirement income tax is approximately 39 million won, and local income tax is 3.9 million won, for a total of approximately 42.9 million won in taxes. The amount received becomes approximately 157.1 million won, resulting in about 21.4% in taxes.

Don't Forget Health Insurance and Employment Insurance Premiums

In addition to taxes, health insurance premiums and employment insurance premiums may be additionally deducted. Whether health insurance is charged depends on your retirement timing. If you retire mid-month, the daily prorated insurance premium for that month may be charged. Employment insurance premiums should be checked in advance if you plan to receive unemployment benefits.

Additionally, beyond income tax withholding, additional payment may occur during subsequent combined income tax filing. If there is other income (employment income, business income, etc.) in the year of retirement, taxes may be recalculated by combining these, so caution is necessary.

5 Severance Pay Tax-Saving Strategies

First, strategically choose your retirement timing. If possible, consider retiring early in the year rather than late in the year to minimize additional income during the remaining months. Also, calculate which time point between January and December results in lower tax burden.

Second, review options to split severance pay reception. By consulting with your company, you may be able to convert part of your severance pay into a pension or receive it over multiple years, dispersing your tax burden. However, this requires company approval.

Third, actively utilize Individual Retirement Pensions (IRP). If you receive your severance pay transferred to an IRP account, more favorable tax treatment may be possible upon future withdrawal. Particularly, if you withdraw after accumulating for 5 or more years, a 15% retirement income tax rate may apply, providing significant tax savings.

Fourth, consider whether you will find new employment. If you decide to find new employment immediately after retirement, you can coordinate your retirement timing with your new company's start date to minimize tax burden. Also, it's helpful to consult on maximizing non-taxable income items (for example, meal allowances, transportation allowances, etc.).

Fifth, identify tax details before immediately investing severance pay. Additional payment may occur based on combined income tax filing results during the months following severance pay receipt, so it's important to prepare for this in advance.

Pre-Retirement Checklist

If retirement is planned, check the following matters in advance. First, verify your exact length of service. Retirement income deduction is directly tied to length of service, so you must verify the service period recognition details provided by your company. If there was a leave of absence, check whether this is included.

Second, request a severance pay calculation statement. The severance pay calculation statement provided by your company records the total amount, deductions, taxes, and other details in detail. Through this, you can verify that tax calculations were done correctly.

Third, decide on your severance pay receipt method. Various receipt methods exist including cash, bank transfer, and pension, and each may have different tax impacts. Consult with your company's HR team in advance to confirm available options.

Fourth, consult with a tax accountant or CPA. If your severance pay is large or the situation is complex, professional consultation is advisable. You can obtain an optimal tax-saving strategy tailored to your situation.

Combined Taxation vs. Separate Taxation: Which Is More Advantageous?

Retirement income is basically subject to separate taxation, but in certain situations, combined taxation with other income may be more advantageous. If there is not much employment or business income in the year of retirement, separate taxation is favorable. However, if you plan to actively utilize actual medical insurance tax deductions or charitable donation tax deductions, you can consider combined taxation.

Also, utilizing basic deduction amounts is important. If you have a spouse or dependents, you can receive personal deductions, which only apply under combined taxation and can have significant tax-saving effects. If your severance pay is substantial, carefully reviewing these deduction items and converting to combined taxation may be more advantageous.

This article is information provided by AI that analyzes and organizes various sources. For more accurate information, please confirm with relevant agencies or professionals.