Last updated: 29 October 2026 · Written by the Peoitaly team, Employer of Record and payroll specialists in Italy.
Key takeaways
- Short answer: TFR (trattamento di fine rapporto) is Italy’s mandatory severance pay. In English it is usually called severance pay or end-of-service allowance.
- Every year the employer sets aside the annual pay divided by 13.5 (about 7.41%), less a 0.50% contribution: in practice about 6.91% of annual pay.
- The accrued amount is revalued every year at 1.5% plus 75% of inflation.
- TFR is paid whenever employment ends, including when the employee resigns.
- Since 1 July 2026, new hires are enrolled in a pension fund by default: unless they opt out within 60 days, their TFR goes to the fund.
TFR is one of the first things foreign employers and employees notice in an Italian payslip. It is not a payment made only when someone is dismissed: it builds up every month for every employee and is paid whenever the employment ends, for any reason. This guide explains what TFR means, how it is calculated, when it is paid and how it is taxed.
What is TFR in Italy?
TFR stands for trattamento di fine rapporto, literally “end-of-employment treatment”. In English it is usually translated as severance pay, end-of-service allowance or severance indemnity. It is due to all private-sector employees, whatever their contract (permanent, fixed-term, full-time or part-time), and is regulated by article 2120 of the Italian Civil Code. Source: Italian Civil Code, art. 2120
Unlike severance in many other countries, TFR is not calculated at the moment of termination and does not depend on who ends the relationship. It is a deferred part of salary that accrues month by month.
How is TFR calculated?
The calculation has three steps:
- Yearly accrual. For each year, the employer sets aside the total annual pay divided by 13.5, which is about 7.41%. Annual pay includes the 13th and 14th month and other regular pay items, unless the collective agreement excludes some of them. Months worked for at least 15 days count as full months.
- Contribution deduction. From the yearly amount the employer deducts 0.50% of annual pay, a contribution paid to INPS. In practice the net accrual is about 6.91% of annual pay.
- Yearly revaluation. On 31 December, the TFR accrued up to the previous year is revalued at a fixed 1.5% plus 75% of the increase in the ISTAT consumer price index (FOI) over the year. A 17% substitute tax is applied to the revaluation.
TFR is based on the pay of every year worked, not on the last salary.
Example: how much TFR on a €40,000 salary?
| Step | Calculation | Amount |
|---|---|---|
| Gross annual pay | – | €40,000 |
| Yearly accrual | €40,000 ÷ 13.5 | €2,962.96 |
| Contribution deduction | 0.50% × €40,000 | – €200.00 |
| Net TFR accrued in the year | – | €2,762.96 |
After five years at the same salary, the employee would have about €13,800 of TFR, plus the yearly revaluations. To estimate the full cost of an employee, including TFR, use our salary calculator for Italy.
When is TFR paid?
TFR is paid as a lump sum whenever the employment ends, whatever the reason: resignation, dismissal, end of a fixed-term contract, retirement or mutual agreement. It is usually paid with the final payslip or within the terms set by the collective agreement. If the employee has chosen a pension fund, the TFR accrued there is paid by the fund under its own rules.
Hiring in Italy? We calculate, accrue and pay TFR correctly from the first payslip.
Talk to PeoitalyCan employees get a TFR advance?
Yes, within limits set by the Civil Code. An employee with at least 8 years of service with the same employer can ask once for an advance of up to 70% of the TFR accrued, to pay for:
- medical expenses for treatment and operations recognised by the public health service;
- buying a first home for themselves or their children;
- certain periods of parental or training leave.
Each year the employer must grant advances to no more than 10% of eligible employees and 4% of the total workforce. Collective agreements or individual contracts may offer more favourable conditions.
How is TFR taxed?
TFR is subject to separate taxation (tassazione separata): it is not added to the income of the year in which it is paid, but taxed at an average rate linked to the employee’s income in previous years. The employer withholds the tax when paying it, and the Revenue Agency may later recalculate it. TFR paid out by a pension fund follows the more favourable tax rules for supplementary pensions.
TFR, pension funds and the INPS Treasury Fund
Employees can choose where future TFR goes:
- Kept by the employer: it stays as a reserve on the company’s books.
- Paid into a supplementary pension fund: it builds the employee’s complementary pension.
Since 1 July 2026, new private-sector hires are enrolled in a pension fund by default: if they do not opt out within 60 days, their TFR goes to the fund. TFR accrued up to 31 December 2025 is not affected. Details in our guide to automatic pension enrolment and TFR in 2026.
Companies with 50 or more employees do not keep the TFR that stays outside pension funds: they must transfer it to the INPS Treasury Fund (Fondo di Tesoreria), which then pays it when the employment ends.
What TFR means for employers
- Cost: about 7.4% of gross pay every year, on top of INPS contributions. See employer costs in Italy.
- Liability: TFR kept by the company is a growing debt towards employees, revalued every year, to be shown in the accounts.
- Cash flow: when someone leaves, the full accrued amount is due at once.
- Onboarding: from July 2026, the pension fund choice must be handled in the first 60 days of employment.
If you hire through an Employer of Record, the EOR accrues and pays TFR as the legal employer and invoices it to you as part of the employment cost.
Frequently asked questions
What is TFR in English?
TFR (trattamento di fine rapporto) is usually translated as severance pay, end-of-service allowance or severance indemnity. It is a deferred part of salary that every employee in Italy accrues and receives when the employment ends.
How is TFR calculated in Italy?
Each year the employer sets aside the annual pay divided by 13.5 (about 7.41%), less a 0.50% contribution. The accrued amount is revalued every year at 1.5% plus 75% of the ISTAT inflation index.
Is TFR paid if the employee resigns?
Yes. TFR is paid whenever the employment ends, whatever the reason: resignation, dismissal, end of contract or retirement.
Can an employee get an advance on TFR?
Yes, once, after at least 8 years with the same employer: up to 70% of the accrued TFR for medical expenses, buying a first home or certain types of leave.
How is TFR taxed?
It is taxed separately from the other income of the year, at an average rate based on the employee’s previous income. The employer withholds the tax when it pays the TFR.
Does TFR go to a pension fund automatically?
For employees hired from 1 July 2026, yes by default: unless they opt out within 60 days, their TFR goes to a supplementary pension fund.
Employing people in Italy? We handle contracts, payroll, contributions and TFR, and reply within 24 hours.
Book a callUpdated October 2026. This article provides general information; the TFR due in a specific case depends on the collective agreement and the employee’s history.
