Tax on Severance Pay in the Netherlands

Receiving a severance payment (transitievergoeding) can be a significant financial event. However, many employees are surprised to find that the amount they actually receive is considerably less than the gross figure mentioned in their settlement agreement or dismissal decision. This is because severance pay in the Netherlands is fully taxed as income. In this article, you will learn exactly how your severance payment is taxed, what effect it has on your allowances, and what you can do to limit the financial impact.

Severance pay is taxed as income

In the Netherlands, a severance payment — whether it is the statutory transitievergoeding, a negotiated compensation in a settlement agreement, or a court-awarded payment — is treated by the Belastingdienst (Dutch Tax Authority) as income from current or former employment. This means it falls under box 1 of the income tax system, which covers income from work and home ownership.

Your employer is required to withhold payroll tax (loonbelasting) and national insurance contributions (premies volksverzekeringen) on the severance payment at the time of payment. This means you receive the net amount in your bank account, not the gross amount stated in your agreement. The withheld tax is an advance payment on your income tax; the final settlement takes place when you file your annual tax return.

There is no separate or preferential tax rate for severance payments in the Netherlands. Unlike some other countries that offer reduced rates or tax exemptions for dismissal compensation, the Dutch system treats your severance payment simply as additional income on top of your regular salary. However, certain components of a severance package (such as outplacement or training) can be provided tax-free under conditions via the work-related costs scheme (werkkostenregeling/WKR). This is an important point to understand when evaluating a severance offer.

Progressive tax brackets in the Netherlands

The Netherlands uses a progressive tax system, meaning that higher income is taxed at a higher rate. For 2025, the combined rate of income tax and national insurance contributions in box 1 is as follows:

• First bracket (up to approximately €38,441): 36.97% (this includes both income tax and premiums for national insurance schemes such as AOW, Anw and Wlz)
• Second bracket (above approximately €38,441 up to €76,817): 36.97%
• Third bracket (above €76,817): 49.50%

The critical issue with severance pay is that it is added on top of your regular annual salary. If your regular salary already places you in the lower brackets, a substantial severance payment can push a significant portion of your total income into the highest bracket of 49.50%. In practice, this means that a large part of your severance may be taxed at nearly 50%.

For example, if you earn €55,000 per year and receive a severance payment of €30,000, your total income for that year becomes €85,000. The portion above €76,817 (approximately €8,183) will be taxed at 49.50% rather than 36.97%. This is an additional tax burden that would not have applied to your regular salary alone.

Difference between gross and net severance

When your employer offers you a severance payment, the amount is almost always stated as a gross figure. The difference between gross and net can be substantial, and understanding this difference is essential for making informed decisions about your settlement agreement.

The net amount you receive depends on several factors:

• Your total annual income: the more you have already earned in the calendar year, the higher the marginal tax rate applied to your severance.
• When in the year you receive the payment: a payment in January means your severance is taxed alongside a full year of salary. A payment in December means the same, unless your employment ended earlier in the year.
• Your personal tax deductions: mortgage interest deduction and other box 1 deductions can reduce the effective tax burden.
• Whether you have other income sources: income from side jobs or freelance work also counts towards your total box 1 income.

As a rough guideline: if your combined regular income and severance payment stays within the lower brackets (up to approximately €76,817), the effective tax rate on your severance will be around 37%. If the payment pushes you above this threshold, the portion above it is taxed at 49.50%. For high earners who already earn above €76,817, the entire severance payment is effectively taxed at 49.50%.

Severance pay and social security contributions

An important distinction to understand is the difference between employer social security contributions (werkgeverspremies) and employee national insurance contributions (premies volksverzekeringen). This affects the actual cost and net value of your severance payment.

Employee national insurance contributions: the premiums for AOW, Anw and Wlz are included in the box 1 tax rate (the 36.97% in the lower brackets). These are automatically withheld from your severance payment along with income tax. Above a certain income threshold, you no longer pay these premiums, which is why the rate changes to 49.50% in the highest bracket (this is pure income tax without national insurance premiums).

Employer social security contributions: your employer pays employer premiums for employee insurance schemes (WW, WIA/WAO, ZW) and the income-dependent healthcare insurance contribution (Zvw). In most cases, these employer premiums are also due on the severance payment. This means the true cost to your employer is higher than the gross amount you see in your agreement. However, these employer contributions do not reduce your net amount — they are an additional cost borne by the employer.

No employee WW/WIA premiums on severance (in most cases): if the severance is paid after the end of the employment, it is generally classified as income from former employment, and no employee premiums for unemployment (WW) or disability (WIA) insurance are due. However, if payment occurs before or simultaneously with the end of the employment, or if the payment contains salary components (such as back pay), the classification may differ and premiums may apply.

The income-dependent healthcare insurance contribution (inkomensafhankelijke bijdrage Zvw) does apply to your severance. If your employer pays this on your behalf (the standard arrangement), it does not reduce your net pay. If you pay it yourself (as is the case with some specific arrangements), this is an additional cost to consider.

Impact on income-dependent allowances

One of the most overlooked consequences of receiving a severance payment is the impact on income-dependent allowances (toeslagen). These allowances are administered by the Belastingdienst/Toeslagen and are based on your annual income. A severance payment increases your annual income, which can reduce or eliminate your entitlement to these allowances for the entire year in which you receive the payment.

The main allowances affected are:

Zorgtoeslag (healthcare allowance)

This allowance helps cover the cost of your mandatory health insurance premium. For 2025, you are only entitled to zorgtoeslag if your annual income is below approximately €38,520 (single person) or €48,224 (with a toeslagpartner). A severance payment that pushes your income above these thresholds means you lose the full year's healthcare allowance, which can be worth up to approximately €1,600 per year for a single person.

Huurtoeslag (housing allowance)

If you rent a home and receive huurtoeslag, the income thresholds are even lower. For 2025, the maximum income for a single person is approximately €34,000 (depending on household composition). A severance payment can easily push your income above this limit, resulting in loss of the full year's housing allowance. This can amount to several thousand euros per year.

Kinderopvangtoeslag (childcare allowance)

If you have children in formal childcare, the kinderopvangtoeslag helps cover the costs. While the income threshold for this allowance is higher, the amount of the allowance decreases as your income rises. A severance payment that significantly increases your annual income can substantially reduce your childcare allowance for that year.

Kindgebonden budget

This allowance for families with children is also income-dependent. Higher income means a lower budget or complete loss of the benefit for the year in question.

Timing of payment considerations

Because the Dutch tax system works on a calendar-year basis, the timing of your severance payment can significantly affect the total tax burden. There are several strategic considerations to keep in mind:

Payment in the year of departure vs. the following year

If your employment ends towards the end of the year, it may be beneficial to negotiate that the severance payment is made in January of the following year rather than in December. If you expect to earn less in the new year (for example, because you will be receiving unemployment benefits instead of your full salary), the severance payment will be added to a lower base income and may fall in a lower tax bracket.

Splitting the payment across two calendar years

In some cases, it is possible to negotiate that the severance is paid in two instalments across two calendar years. This can keep both years' income below the highest bracket threshold, resulting in a lower overall tax rate. However, your employer is not obliged to agree to this arrangement, and there are practical and legal considerations to discuss with a tax advisor.

Impact on allowances in the payment year

If you currently receive income-dependent allowances, timing the payment in a year where you already exceed the income thresholds (for example, a year with a full salary) may limit the additional loss. Conversely, receiving the payment in a year where you would otherwise be below the thresholds (for example, a year mostly on unemployment benefits) can cost you your full year's allowances.

The stamrecht option (no longer available)

Before 1 January 2014, employees in the Netherlands had the option to place their severance payment in a so-called stamrecht (annuity right). This was a tax-efficient structure where the severance was not taxed immediately upon payment but was instead deposited into a special savings account, investment account, or insurance product (a stamrecht-BV, stamrecht-verzekering, or stamrecht-spaarrekening). The tax was only due when the funds were paid out as periodic payments, typically after retirement when the former employee was in a lower tax bracket.

Since 1 January 2014, the stamrecht option has been abolished by the Dutch government as part of the broader reform of dismissal law (Wet werk en zekerheid). This means that if you receive a severance payment today, you cannot defer the taxation by placing it in a stamrecht arrangement. The full amount is taxed in the year of payment.

If you still have a stamrecht from before 2014, different rules apply to the disbursement of those funds. You can generally choose when to start receiving periodic payments, although the funds must be paid out by a certain age. If you are in this situation, it is advisable to consult a tax advisor about the optimal disbursement strategy.

Since the abolition of the stamrecht, there is no general tax-deferred option for severance payments in the Netherlands. The remaining strategies to manage the tax impact include timing (as discussed above), ensuring that any tax deductions you are entitled to are claimed in the same year as the severance payment, and structuring certain components of the severance package (such as outplacement or legal costs) in a tax-efficient manner via the work-related costs scheme (WKR).

Practical examples

To illustrate the tax impact of a severance payment, here are three practical examples based on the 2025 tax rates. These are simplified calculations for illustrative purposes; your actual tax position may differ depending on deductions, tax credits, and personal circumstances.

Example 1: Moderate salary, moderate severance

Anna earns €45,000 per year. She receives a severance payment of €15,000 gross. Her total income for the year becomes €60,000.

• Without severance: all income taxed at 36.97%
• With severance: all income still remains within the 36.97% bracket (below €76,817)
• Tax on the €15,000 severance: approximately €5,546 (36.97%)
• Net severance: approximately €9,454

Example 2: Higher salary, significant severance

Mark earns €65,000 per year. He receives a severance payment of €25,000 gross. His total income for the year becomes €90,000.

• Without severance: all income taxed at 36.97%
• With severance: €76,817 is taxed at 36.97%, the remaining €13,183 is taxed at 49.50%
• Tax on the €25,000 severance: €11,817 at 36.97% (€4,369) + €13,183 at 49.50% (€6,526) = approximately €10,895
• Net severance: approximately €14,105
• Mark also loses his zorgtoeslag for the year, adding approximately €1,200 in lost benefits

Example 3: High earner

Sophie earns €95,000 per year. She receives a severance payment of €40,000 gross. Her total income for the year becomes €135,000.

• Without severance: already above the €76,817 threshold
• With severance: the entire €40,000 is taxed at 49.50%
• Tax on the €40,000 severance: approximately €19,800
• Net severance: approximately €20,200
• Sophie keeps just over half of the gross amount

These examples clearly show how the progressive tax system disproportionately affects larger severance payments and higher earners. The higher your regular income, the greater the percentage of your severance that goes to tax.

Tax tips for your severance payment

While you cannot avoid paying tax on your severance, there are legitimate strategies to reduce the overall tax burden:

• Negotiate the timing: as discussed, request payment in a year where your other income is expected to be lower.
• Maximise tax deductions in the payment year: if you have deductible expenses (such as mortgage interest, gifts to charity, or specific healthcare costs), ensure these are claimed in the same year as the severance payment to reduce your taxable income. Note that certain deductions (such as mortgage interest) are subject to a maximum deduction rate that may be lower than your marginal tax rate.
• Consider pension contributions: in some cases, you may be able to make additional voluntary pension contributions (lijfrente) to reduce your taxable income. The annual fiscal room (jaarruimte) or unused room from previous years (reserveringsruimte) can be used for this purpose. Consult a tax advisor about the possibilities.
• Negotiate a net severance: in some settlement agreements, a net severance amount is agreed upon, meaning the employer pays the tax on top of the agreed amount. This is more expensive for the employer and therefore not always achievable, but it is worth discussing.
• Account for allowance loss: when negotiating your severance amount, factor in the potential loss of income-dependent allowances. This is a real cost that should be considered as part of the total financial picture.
• Seek professional advice: a tax advisor or financial planner can calculate the exact net outcome and suggest strategies tailored to your situation. The cost of this advice often pays for itself.

Frequently asked questions about tax on severance pay

Is severance pay taxed in the Netherlands?

Yes, severance pay is fully taxed as income from (former) employment in box 1 of the Dutch income tax system. Your employer withholds payroll tax at the time of payment. There is no tax exemption or reduced rate for severance payments. The final tax settlement occurs when you file your annual tax return.

How much tax will I pay on my severance?

The amount of tax depends on your total annual income in the year you receive the payment. For 2025, the rate is 36.97% for income up to approximately €76,817 and 49.50% for income above that threshold. Your severance is added to your regular salary, so the marginal rate (the rate on the last euros earned) determines how much tax you pay on the severance.

Can I defer the tax on my severance payment?

Since 1 January 2014, the stamrecht option for tax deferral has been abolished. You cannot place your severance in a tax-deferred arrangement. The only way to manage the tax impact is through timing of the payment and maximising deductions in the year of payment. In some cases, voluntary pension contributions (lijfrente) within your fiscal room can reduce taxable income.

Does my severance payment affect my allowances?

Yes, a severance payment increases your annual income, which can reduce or eliminate your entitlement to income-dependent allowances such as zorgtoeslag (healthcare allowance), huurtoeslag (housing allowance), kinderopvangtoeslag (childcare allowance), and kindgebonden budget. The impact applies to the full calendar year in which the payment is received. Report income changes to the Belastingdienst/Toeslagen promptly to avoid repayment obligations.

Is it better to receive severance pay in December or January?

This depends on your expected income in both years. If you will earn less in the following year (for example, because you will be on unemployment benefits), it may be advantageous to receive the severance in January. If your income will be similar or higher the next year, the timing may make less difference. A tax advisor can calculate the optimal scenario for your situation.

Can I negotiate a net severance amount instead of gross?

Yes, it is possible to negotiate a net severance amount in your settlement agreement, where the employer covers the tax on top of the agreed figure. However, this is significantly more expensive for the employer (they may need to pay 1.5 to 2 times the net amount in gross terms), so it is not always achievable. It is one of several negotiation points to discuss with your lawyer.