Why it is taxed separately
Korea created statutory severance pay in 1953 and occupational pensions in 2005. Taxing decades of accrued pay as one year's income would push people into top brackets, so the Income Tax Act taxes retirement income on its own schedule and spreads it over years of service. The 12× conversion method has applied since 2016, and the service deduction rose sharply for departures from 1 January 2023.
How the calculation works
- Subtract the years-of-service deduction from retirement income.
- Divide by years of service and multiply by 12 to get converted pay.
- Subtract the tiered converted-pay deduction to get the tax base.
- Apply the 6–45% schedule, then divide by 12 and multiply by years of service.
| Years of service | Deduction (2023–) |
|---|---|
| Up to 5 | KRW 1m × years |
| 5–10 | KRW 5m + 2m × (years − 5) |
| 10–20 | KRW 15m + 2.5m × (years − 10) |
| Over 20 | KRW 40m + 3m × (years − 20) |
Local income tax adds 10%, and the employer withholds at payout. Use the Hometax simulator for exact figures.
Why an IRP changes the bill
Moving severance into an individual retirement pension (IRP) defers the tax; drawing it as a pension after 55 means paying only 70% of the deferred tax, or 60% for amounts drawn after ten years. Research shows people follow defaults more than tax incentives (Madrian & Shea, 2001; Chetty et al., 2014), so simply parking the money in an IRP protects the benefit. See pension savings too.
FAQ
- When is the tax paid?
- Your employer withholds it at payout, unless the money goes into an IRP.
- Is severance included in year-end settlement?
- No. Retirement income is taxed separately.
Sources reviewed: 2026-11-09
References
- 소득세법 제22조 (퇴직소득)·제48조 (퇴직소득공제)·제55조 (세율). Income Tax Act articles defining retirement income, deductions and rates.
- 소득세법 제146조 (퇴직소득에 대한 원천징수) 및 근로자퇴직급여 보장법. Withholding on retirement pay and tax deferral via IRP transfers.
- 국세청 홈택스. (n.d.). 퇴직소득세 모의계산. Official National Tax Service retirement income tax simulator.
- 금융감독원 통합연금포털. (n.d.). 퇴직연금 세제: 연금수령. FSS guide: pension-style withdrawal cuts retirement income tax by 30–40%.
- Madrian, B. C., & Shea, D. F. (2001). The power of suggestion: Inertia in 401(k) participation and savings behavior. The Quarterly Journal of Economics, 116(4), 1149–1187. Shows default enrollment sharply raises retirement saving.
- Chetty, R., Friedman, J. N., Leth-Petersen, S., Nielsen, T. H., & Olsen, T. (2014). Active vs. passive decisions and crowd-out in retirement savings accounts: Evidence from Denmark. The Quarterly Journal of Economics, 129(3), 1141–1219. Most savers are passive; tax subsidies mainly move active savers.
- Benartzi, S., & Thaler, R. H. (2007). Heuristics and biases in retirement savings behavior. Journal of Economic Perspectives, 21(3), 81–104. Reviews behavioral biases in retirement saving decisions.