Before spending severance pay, check individual income tax: amounts within three times the local prior-year average employee wage are tax-free; the excess is taxed separately, not merged into that year’s salary

One-time compensation from ending an employment relationship is tax-free up to three times the local prior-year average employee wage. Amounts above that are taxed on their own, not added to your annual comprehensive income. If the employer lumped the whole payment into monthly wages and withheld tax that way, ask the employer first, then call 12366 for the tax bureau.

No cost. Look up the local prior-year average employee wage, then spend a few minutes checking how the employer withheld tax. The individual income tax app shows line-by-line filing for each payment.

A Ministry of Finance and State Taxation Administration circular states that one-time compensation income from terminating a labor relationship with an employer — including economic compensation, living allowances, and other subsidies — is exempt from individual income tax within three times the local prior-year average employee wage. The portion above three times is not merged into annual comprehensive income; it is taxed separately under the comprehensive income rate table. That table taxes annual amounts up to 36,000 yuan at 3%, 36,000 to 144,000 yuan at 10%, and higher brackets up to 45%. Example: if the local prior-year average employee wage is 100,000 yuan, three times is 300,000 yuan. On 360,000 yuan compensation, only the 60,000 yuan excess is taxed — 3,480 yuan. If the full 360,000 yuan were taxed under that table, tax would be 58,080 yuan. Effective 1 January 2019; no end date stated (nationwide).

The same circular sets an end date for the annual one-time bonus policy, later extended to 31 December 2027. The termination-compensation rule has no end date and does not follow the bonus extension. The circular names economic compensation, living allowances, and other subsidies; it does not separately name payment in lieu of notice or damages for unlawful termination. If unsure whether those count, call 12366 locally. Which figure counts as “local prior-year average employee wage” is determined by the local tax bureau. How compensation is calculated: this section item 4 (calculate N when laid off), item 5 (no 30-day notice), item 6 (damages for unlawful termination). One-time subsidies for early retirement or internal retirement use a different formula and are not covered here.

财政部、税务总局 (2018). 关于个人所得税法修改后有关优惠政策衔接问题的通知（财税〔2018〕164 号，第五条第（一）项、第八条、第九条）. https://fgk.chinatax.gov.cn/zcfgk/c102416/c5202364/content.html（国家税务总局政策法规库）；财政部、税务总局 (2023). 关于延续实施全年一次性奖金个人所得税政策的公告（2023 年第 30 号）. https://fgk.chinatax.gov.cn/zcfgk/c102416/c5211524/content.html（国家税务总局政策法规库）；全国人大常委会 (2018 修正). 个人所得税法（第三、九条，个人所得税税率表一）. https://flk.npc.gov.cn/detail?id=2c909fdd678bf17901678bf724bd0609