Severance pay kept in the business is a debt, and with high inflation it costs more than a loan
14 November 2026, 08:17
In October consumer prices in Italy rose by 5.6 per cent on a year earlier, against 4.2 in September: this is the preliminary estimate of the European harmonised index, reported by the Bank of Italy in its November summary of the Italian economy. For a business with employees that figure has a direct consequence, one that barely shows in the accounts: it pushes up the cost of the severance pay kept in the company.
The fund is revalued every year under a rule written in the Civil Code
The trattamento di fine rapporto (TFR), Italian severance pay, is the sum a business sets aside for each employee and pays out when the employment ends. Article 2120 of the Civil Code builds it as follows: every year a portion equal to the annual salary divided by 13.5 is added, and the fund accumulated up to the previous 31 December is revalued, while the portion accruing in the current year is not. The revaluation is 1.5 per cent fixed plus three quarters of the increase that Istat (Italy's national statistics institute) measures, from December to December, in consumer prices for blue- and white-collar households.
For the business that fund is a debt towards its workforce, which stays in its coffers until the employee resigns, retires or asks for an advance. It therefore works like a loan, with one peculiarity: nobody negotiates the rate, inflation sets it. With prices growing by 1 or 2 per cent, the revaluation stays between 2.25 and 3; when prices run, it rises with them. From December 2025 to September 2026, applying the rule to Istat's indices, the revaluation accrued had already reached 4.29 per cent, in nine months. According to the Bank of Italy, in August new bank loans to businesses cost on average 3.71 per cent for a whole year, and 4.40 per cent for loans of up to €1 million.
The cost does not weigh on everyone in the same way. Since 2007 employers with at least 50 employees have paid the TFR as it accrues into the Treasury Fund of INPS, Italian social security (Law 296 of 2006, Article 1, paragraph 755), and in every company the portion the employee has assigned to a pension fund leaves the business. Two sums therefore remain in the company and are revalued at its expense: in businesses with fewer than 50 employees, the TFR of those who have not chosen a pension fund; in larger ones, the fund accrued up to 2006.
In the profit and loss account the revaluation sits among staff costs
Under Italian accounting standards the revaluation is recorded together with the portion for the year under item B9c of the profit and loss account, among staff costs. The interest on a bank loan, by contrast, sits among financial charges, below EBITDA, the margin before interest, taxes, depreciation and amortisation. This gives rise to a frequent misreading: whoever looks at staff costs attributes the increase to salaries, whoever measures how much debt weighs counts only the banks, and the TFR is left out of both lines of reasoning in precisely the year when it costs the most.
On the revaluation the business withholds from employees a substitute tax of 17 per cent (Legislative Decree 47 of 2000, Article 11, paragraph 3) and pays it to the Treasury on their behalf: an advance payment on 16 December, the balance on 16 February of the following year. The tax reduces the employees' fund and is not a cost for the business, but the money leaves its current account in December.
Three things to do before the year closes
The first step is to ask the payroll consultant, or whoever handles payroll, for the TFR fund at 31 December 2025 of the employees who leave it in the company: they already calculate it, person by person, precisely in order to revalue it. Multiplied by the percentage accrued in the year, the fund shows how much the 2026 revaluation costs: on €600,000, the 4.29 per cent of the first nine months alone already comes to about €25,700. Many companies record the revaluation only at the year end, and then in the monthly accounts staff costs look lower than they really are until December. Whoever handles controlling estimates it every month, separately from the portion for the year, and in the 2027 forecasts calculates it on expected inflation, not on that of the years when prices grew little.
The second step concerns cash: the forecast for the next three months includes the advance payment of the substitute tax and the TFR outflows already known: retirements, announced resignations, advances requested by employees.
The third step is to put the TFR fund on the list of debts, alongside mortgages and credit lines, with its rate for the year. On that list what the items of the financial statements keep apart becomes visible: part of the money that keeps the business running belongs to its employees, and this year it costs more than many loans.
This article was prompted by a news item published in SimplyBiz on 11 November 2026.