What Is Included in a Severance Payment in Spain and How to Calculate It

What is a severance payment?

The severance payment (finiquito) is the document that records the settlement of all outstanding financial items between employer and employee at the end of the employment relationship. It must not be confused with redundancy compensation, which is a separate concept that only applies in certain types of dismissal.

The three items in a severance payment

• •1. Current month salary: the days worked in the month of termination that remain unpaid
• •2. Pro-rata bonus: the time worked since the last bonus payment received
• •3. Unused holiday: the holiday entitlement accrued but not taken, calculated on the daily gross salary

Step-by-step example

Employee on €24,000/year (14 payments), daily gross = €24,000/365 = €65.75. Leaves on 20 June with 20 unused holiday days and 5 months and 20 days since the last December bonus: June salary: 20 × €65.75 = €1,315; pro-rata bonus: (5+20/30)/12 × €2,000 = ~€933; holidays: 20 × €65.75 = €1,315. Total gross severance: ~€3,563.

Is tax payable on the severance payment?

Yes. The severance payment is taxed as employment income. The employer must apply income tax withholding at the employee's marginal rate. The net amount you receive is the gross minus withholding and the corresponding Social Security contributions.