Severance & Retirement Tax
Severance pay plus retirement income tax.
Statutory formulaBased on 2026 rulesSources: Employee Retirement Benefit Security Act · Ministry of Employment & Labor · National Tax Service
Estimated severance pay
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Severance = daily wage × 30 × (days ÷ 365). Retirement income tax is a simple estimate reflecting service-year and converted-pay deductions.
What is severance pay?
Severance pay is a statutory payment required under Korea's Labor Standards Act for employees with at least 1 year of continuous service and 15+ scheduled weekly hours. It is based on the average wage over the last 3 months multiplied by days of service.
How it's calculated
Average daily wage = (wages over last 3 months + annual bonus×3/12 + leave allowance×3/12) ÷ total days in that 3-month period. Severance = average daily wage × 30 × (days employed ÷ 365).
How is retirement income tax applied?
Retirement income tax uses year-averaging to ease the burden on long service: subtract the service-year deduction from the severance, multiply by 12 and divide by years of service to get converted pay, subtract the converted-pay deduction, apply the income-tax brackets, then convert back by years and 12. A local income tax of 10% of the calculated tax is added. Years of service are counted on a calendar basis, rounding any partial year up.
Notes
Worked examples (monthly wage 3,000,000 KRW)
Example 1. 3 years of service, monthly wage 3,000,000 KRW.
- Average daily wage ≈ 3,000,000 × 3 ÷ 91.25 = 98,630 KRW
- Severance = 98,630 × 30 × (1,096 days ÷ 365) = 8,884,819 KRW
- Service-year deduction (3 yrs) 3,000,000 → converted pay 23,539,276 → taxable base after converted-pay deduction 6,215,710 KRW
- Retirement income tax (est.) 93,236 · local tax 9,324 → after-tax severance 8,782,259 KRW
Example 2. 10 years of service, monthly wage 3,000,000 KRW.
- Average daily wage ≈ 98,630 KRW (same)
- Severance = 98,630 × 30 × (3,652 days ÷ 365) = 29,605,254 KRW
- Service-year deduction (10 yrs) 15,000,000 → converted pay 17,526,305 → taxable base 3,810,522 KRW
- Retirement income tax (est.) 190,526 · local tax 19,053 → after-tax severance 29,395,675 KRW
Severance & tax by years of service
Assuming a monthly wage of 3,000,000 KRW, longer service increases both the severance amount and the service-year/converted-pay deductions, so the after-tax share tends to rise with tenure.
| Years of service | Severance | Retirement + local tax | After-tax severance |
|---|---|---|---|
| 1 year | 2,958,904 | 34,115 | 2,924,789 |
| 3 years | 8,884,819 | 102,560 | 8,782,259 |
| 5 years | 14,802,627 | 170,789 | 14,631,838 |
| 10 years | 29,605,254 | 209,579 | 29,395,675 |
| 20 years | 59,218,615 | 155,372 | 59,063,243 |
Pension schemes and interim settlement change the tax
How severance is received matters as much as how much it is. Lump sum or pension changes the tax, and an interim settlement changes the calculation itself.
Defined benefit and defined contribution
Under a defined benefit plan the amount is fixed by formula — average wages over the final three months times years of service — which suits steadily rising pay, with the employer bearing investment risk.
Under defined contribution the employer pays at least one twelfth of annual wages into the worker's account each year and the worker invests it, so the outcome varies with performance.
Switching to defined contribution before a wage-peak scheme begins prevents the reduced final wages from dragging down the whole entitlement.
Interim settlement is tightly restricted
Interim settlement is allowed only on statutory grounds: buying a first home, funding a lease deposit, six months or more of care for the worker or a dependant, or bankruptcy or rehabilitation proceedings.
Settling resets the service period, and since the retirement income deduction grows with length of service, it can raise the tax on the final payment.
A special recalculation at retirement can combine the periods either side of the settlement, but whether that helps depends on the amounts and periods involved.
Receiving through an IRP defers the tax
Paying severance into an individual retirement pension account defers the tax until withdrawal, leaving the deferred amount invested in the meantime.
Drawing it as a pension from 55 reduces the burden further, at a lower rate than the lump-sum tax, and the longer the drawdown the better. Taking a lump sum instead triggers the deferred tax in full.
Payment into such an account is the default, with exceptions for retirement after 55 and for small amounts.
Legal basis
- Payment of retirement benefits — Employee Retirement Benefit Security Act arts. 8-9
- Grounds for interim settlement — Enforcement Decree art. 3
- Retirement income tax — Income Tax Act arts. 48 and 55(2)
- IRP transfer and pension drawdown — Retirement Benefit Act art. 17