What's the difference: severance pay and transition pay?

When you face dismissal in the Netherlands, the law has arranged that you are entitled to a number of allowances. These allowances were not just created by the government and are intended to make your transition to a new job easier.

That way, you can calmly start reapplying for another job and you or your family won't get into immediate trouble.

The two compensations you are entitled to upon dismissal are transitional compensation and severance pay. But where exactly is the difference between these two compensations and how are they calculated?

The legislation around transfer compensation and severance pay has changed quite a bit and will be very different in 2025 than before (source: official rules on dismissal).

Before 2015, compensation was calculated on the so-called 'subdistrict court formula'. This was a guideline for subdistrict courts to determine what the amount of your compensation would be and was quite complex. It looked at how many years you had been employed, your gross monthly salary and a so-called correction factor.

Just to show how complex this formula was: for example, for years in service, those at older ages outweighed those at younger ages. 

The adjustment factor was a factor that was then applied based on the circumstances surrounding your dismissal. Are you still following it?

Of course, this was VERY TOO complicated, and going to court was often made by employees.

With the introduction of the 'Work and Social Security Act' (WWZ) in 2015 is the transition allowance came as legally required compensation for employees who are dismissed. Thus, as an employee, you have instant visibility of what compensation you are entitled to. 

The change in the law in 2015 made the transition allowance a statutory compensation that your employer has to pay when you are dismissed with a permanent contract, your temporary contract is not renewed or your employment contract is terminated at the employer's initiative.

Since 1 January 2020, you accrue this allowance from your first working day, so even during your probation.

The amount of compensation is calculated based on your years of service and gross monthly salary. Every year, the maximum amount of transition compensation is redetermined the government. A Overview of maximum transitional compensation can be found here.

Is your gross annual salary higher than this amount? Then you will receive one time your gross annual salary as transition compensation.

The transition allowance is a legal right for almost all employees in the Netherlands, but there are some conditions and exceptions you need to consider.

You are entitled to transition allowance when:

• Your employment contract is terminated on the initiative of your employer

• Your temporary contract is not renewed

• You have been employed from your first working day (since 1 January 2020)

• You are over 18 years old

There are situations where you are not entitled to transition compensation. For example, the most common reason is when you resigns himself (unless there is culpable action by the employer, forcing you to resign).

In addition, you are not entitled to a transition payment if you are dismissed as an employee due to gross misconduct. For example, think of structural theft of your boss's property, fraud, or serious misconduct in the workplace.

You are not entitled to a transition payment, even when you reach the state pension age or when your employer goes bankrupt.

But be aware: in certain cases of bankruptcy, you may still be entitled to a transitional payment. Always have your personal situation checked for free by an employment lawyer.

There are also certain exceptional situations in which you are entitled to a transition payment. You are entitled to a transition payment in the following exceptional situations:

• Upon dismissal following 2 years of incapacity for work:
  Employers can for the transition payment in this case apply for compensation from the UWV. In many cases, they therefore do not have to cough up the transition payment from their own pocket.
• In the case of economically motivated redundancies, for example, a reorganisation:
  In this situation, you are also entitled to a transition payment. Is there a social plan? Then the transition payment could turn out to be considerably higher than the statutory amount.
• If you are dismissed during your probationary period:
  In this situation, you are also entitled to a transition payment. This payment will be lower, as your length of service is short. 

The transition payment is considered regular salary as you previously received and is therefore fully taxed in box 1. So, if your employer pays out a transition payment after your dismissal, payroll tax will be withheld by your employer. This means the net amount will be lower than the gross amount awarded in the settlement agreement. 

Many people find it difficult to calculate how much you are left with from the gross amount. Below we provide a calculation example where you can easily see how much you are left with from the gross amount.

To determine how much you will have left from your transition payment after tax, you need to:

1. Add your transition payment to your annual salary

2. Determining which tax bracket your total income falls into

3. Calculate the tax payable on the total amount

In 2025, the tax rate in the first bracket (up to €38,441) is 35.82%. Above that, a rate of 37.48%applies (up to €76,817). Earn more than that? Then you will pay 49.50% tax on your income (and therefore also on your statutory severance pay). 

Naturally, you'll want to keep as much as possible of your gross severance pay, and there are various ways to achieve this. We've listed a few for you: 

1. Training or outplacementThe government believes it's important for you to start a new job as quickly as possible. That's why they're offering a tax-advantageous option to use your transition payment for training or an outplacement programme. In this case, the amount will be used for training and deducted from your salary before tax. Consequently, it won't be seen as taxable income, as in the example calculation above (in box 1), and you won't have to pay tax on it. So, if you had your eye on that one course that was always too expensive before? Then it's definitely a tax-advantageous option to discuss this with your employer.

2. Spreading over several yearsMany legal professionals will still point out the option to spread your transition payment over several years using the averaging scheme. This allows you to pay less tax on your transition payment because, in some cases, you won't be placed in a higher tax bracket from a fiscal perspective. Unfortunately, this is no longer possible since 1 January 2023. The last period over which averaging was still possible was 2022-2023-2024. In some cases, it is still possible to make arrangements with your employer to continue salary payments over the year (the end date of your contract is negotiable). This may result in you paying less income tax per tax year.

3. Right of inheritance trustOther methods, such as the 'stamrechtconstructie' (a legal structure for deferring tax on certain benefits), to spread a transition payment over multiple years for tax purposes are also no longer available from 2014.

4. Using the annual allowance for your pensionThis might not be the first option you thought of for using your transition payment, but it is an option that results in you paying less tax on your gross transition payment. This is because it provides a tax deduction.

Tax regulations are complex, and therefore it is advisable to seek free advice from us on how best to have your transition payment paid out. It is also useful at the same time to mention the rest of your employment conditions, so that our lawyer can also advise you on the severance pay you are entitled to.