PIT on Severance Pay in Vietnam: A Compliance Guide For Final Paycheck

Key takeaways

• Severance allowance paid in strict accordance with the Labor Code is fully exempt from Personal Income Tax (PIT), while any excess amount and other additional support payments are taxable at different rates.
• The timing of the payment determines the tax calculation method: payments made before termination are subject to the progressive tax schedule, while payments made after termination are subject to a flat 10% withholding for amounts of 2 million VND or more.
• Businesses must establish a clear process to accurately distinguish between different types of termination payments and apply the correct tax withholding method for each.

When an employment contract ends, a business must handle several complex payments to the employee, including their final month’s salary, payment for unused annual leave, severance allowance, and other support funds. Correctly identifying which amounts are taxable and which are exempt requires a clear understanding of current legal regulations to properly calculate PIT for departing employees.

Classifying termination payments

Accurately classifying payments made upon contract termination is the first and most critical step in ensuring tax compliance. Each type of payment is treated differently for tax purposes.

1. PIT-exempt allowance

According to Point b, Clause 2, Article 2 of Circular 111/2013/TT-BTC, severance allowance paid at the level stipulated by the Labor Code is not included in an employee’s taxable income for PIT purposes.

Severance allowance is designed to support employees during their career transition and is legally protected from taxation to uphold the humanitarian nature of labor policy. The formula for calculating severance allowance is:

Severance Allowance = ½ x Average Salary of Last 6 Months x Years of Service for Calculation

The key parameters for this calculation include:

• Average salary: The average monthly salary under the employment contract for the six consecutive months before termination.
• Years of service for calculation: The total time the employee has worked for the company, minus the period they contributed to unemployment insurance and any period for which severance or job-loss allowance has already been paid. A period of less than six months is counted as 0.5 years, while more than six months is rounded up to one full year.
• Coefficient of 1/2: The employee receives half a month’s salary for each eligible year of service.

It is crucial to distinguish between severance allowance and unemployment allowance. Severance allowance is paid by the employer for the working period during which the employee did not participate in unemployment insurance. In contrast, unemployment allowance is a benefit paid by the Social Insurance agency if the employee has contributed to the unemployment fund and has not yet found a new job after leaving.

2. Taxable income

All other payments made upon termination are considered taxable income, including:

• Salary and wages for the final days worked.
• Payment for unused annual leave days.
• The portion of severance allowance that exceeds the amount stipulated by the Labor Code.
• Any other support payments, bonuses, or compensation not specified in the Labor Code or the Law on Social Insurance.

“Goodwill” payments that a company voluntarily provides beyond its legal obligations—while positive for maintaining good relationships with former staff—must still strictly adhere to tax regulations. This includes payments for outplacement services, farewell bonuses, or any additional compensation that exceeds the legally mandated amounts.

How to calculate PIT for departing employees

The method for calculating tax on termination payments depends not only on the nature of the payment but also on the timing of when it is made.

Scenario 1: The allowance is paid at the legally required level

For each eligible year of service, the employee is entitled to a severance payment of one-half (1/2) of their average monthly salary from the last six months. According to Article 46 of the 2019 Labor Code and Circular 111/2013/TT-BTC, this income is completely exempt from PIT.

Example: An employee has one year of service eligible for severance allowance, and their average salary over the last six months was 8,000,000 VND (320 USD).

• Legally required severance: ½ x 8,000,000 VND x 1 year = 4,000,000 VND (160 USD)
• Result: This entire 4,000,000 VND (160 USD) payment is exempt from PIT.
• Note: The company must maintain complete documentation proving the allowance was calculated according to regulations.

Scenario 2: The payment exceeds the legally required level

The portion of the payment that exceeds the regulated amount is subject to PIT. The withholding method depends on when the payment is made.

Case 1: Payment is made before the contract ends

The excess amount is added to the final month’s income and other payments (salary, bonus, unused leave) to be taxed according to the progressive tax schedule.

Example: Continuing the example above, the company provides an additional 1,000,000 VND (40 USD) on top of the legally required 4,000,000 VND (160 USD).

• If this amount is paid with the final month’s salary, the 1,000,000 VND (40 USD) is added to that month’s taxable income.
• Assume the total taxable income for the final month is 15,000,000 VND (600 USD), including the extra support.
• After the personal deduction of 11,000,000 VND (440 USD): 15,000,000 – 11,000,000 = 4,000,000 VND (160 USD) of income subject to tax.
• Applying the progressive tax schedule, this amount falls into the lowest bracket: 5%.

The tax payable for the final month, including the excess payment, would be 4,000,000 VND x 5% = 200,000 VND (8 USD).

Case 2: Payment is made after the contract ends

If the additional payment (the excess portion) is 2,000,000 VND (80 USD) or more per payment, the company must withhold PIT at a flat rate of 10% on the total amount before paying the individual.

Example: One month after termination, the company decides to pay an additional support amount of 5,000,000 VND (200 USD) to the former employee.

• Tax to be withheld: 5,000,000 VND x 10% = 500,000 VND (20 USD)
• Net amount the employee receives: 5,000,000 – 500,000 = 4,500,000 VND (180 USD)
• Company’s obligation: Issue a tax withholding certificate to the former employee, which they can use for their year-end tax finalization if needed

Frequently asked questions about PIT for departing employees

Can I get a PIT refund after leaving a job?

Yes. If you have overpaid your taxes for the year, or if your total annual income is below the taxable threshold, you are eligible for a PIT refund through the personal tax finalization process, even after leaving your job.

How is PIT calculated for a probationary period?

Income from a probationary period of 2,000,000 VND (80 USD) or more per payment is subject to a 10% PIT withholding before payment. The only exception is if the individual is eligible to and submits a formal commitment (using form 08/CK-TNCN) stating that their total annual income will not reach the taxable threshold.

What is the difference between severance allowance and unemployment allowance?

Severance allowance is a payment made by the employer to the employee when the employment contract is terminated, intended to provide support for a period. This allowance is calculated based on the employee’s actual time working for that specific company.

Unemployment allowance is a benefit paid by the Social Insurance agency if the employee has contributed to the unemployment insurance fund and has not found a new job. An individual can receive both benefits simultaneously if they meet the separate eligibility criteria for each.

Both severance allowance and unemployment allowance are PIT-exempt if paid according to state regulations. For severance/job-loss allowance, only the portion paid according to the law is tax-free; any amount paid above the legal limit is taxable. In contrast, the entire unemployment allowance is always tax-free.

How do I finalize my PIT when I leave a job?

If you leave a job during the year and it was your only source of income, you may be able to authorize your final company to complete the tax finalization on your behalf. If you worked at multiple companies or left mid-year without a new job, you must self-finalize your taxes with the tax authority early the following year.

Is income received after leaving a job still taxed?

Yes. If you receive income or other payments from your former company after your employment has ended, the company will withhold 10% PIT if the payment is 2,000,000 VND (80 USD) or more. You still have the right to finalize this tax amount at the end of the year to settle any overpayment or underpayment.

How do I finalize my taxes if I leave a job mid-year?

If you worked at more than one company and left your job mid-year, you are required to self-finalize your taxes directly with the tax authority. You must submit the required tax forms (02/QTT-TNCN) and supporting documents early in the following year, before the March 31 deadline.Incorrectly handling PIT for departing employees creates direct financial and legal risks for a business. CEOs and company leaders must instruct their HR and Accounting departments to immediately review their PIT finalization processes for terminated employees, ensuring every payment is correctly classified and taxed at the right time. For companies needing expert support, Talentnet’s professional PIT declaration and payroll services can help prevent costly penalties and back-tax claims in the future. This is not just a matter of compliance; it reflects the professionalism and responsibility of a company toward its people, helping to build its reputation as a trusted employer.