Korean Severance Tax: Why 3 Years Costs 60x More Than 30

On a severance payout of 100 million won, Korea's retirement income tax comes to 240,000 won after thirty years of service — and 14.54 million won after three. Same money, sixty times the tax.

That gap makes no sense if you assume the amount alone drives the bill. The calculation order published by Korea's National Tax Service uses years of service twice: once as a deduction, and once as a divisor that drags the payout down into a lower bracket. A short stint gets a double-digit effective rate; a long career ends up close to tax-free.

The six-step order, and where service years enter

Retirement income is taxed separately from all other income. The steps are fixed:

1. Retirement income = gross severance − non-taxable portion
2. Subtract the service-year deduction
3. Converted salary = (retirement income − service-year deduction) ÷ years of service × 12
4. Subtract the converted-salary deduction → tax base
5. Computed tax = tax base × basic rate − progressive credit
6. Retirement income tax = computed tax ÷ 12 × years of service

Step 3 is called yeonbun-yeonseung — dividing by years and multiplying by twelve. It stops money accumulated over decades from being taxed as if it were earned in a single year. Longer service means a bigger divisor, a smaller converted salary, and a lower bracket. Step 6 scales the figure back up, but the low rate already applied.

Two deduction tables do the work

The service-year deduction has used the raised amounts since January 1, 2023. Partial years round up to a full year.

The converted-salary deduction tapers by band: everything up to 8 million won, then 60%, 55%, 45% and 35% of the excess.

Hold the payout at 100 million won and move only the years

Feeding both tables plus the basic rates (6% up to 14m won; 15% up to 50m with a 1.26m credit; 24% up to 88m with 5.76m; 35% up to 150m with 15.44m; 38% up to 300m with 19.94m) into the formula gives this, assuming no non-taxable portion. Amounts are in units of 10,000 won.

Walk the three-year row and the mechanism shows itself. The deduction is only 3 million won; dividing the remaining 97 million by three and multiplying by twelve inflates the converted salary to 388 million won. Even after the 182.5 million deduction for that band, the tax base is 205.5 million — a 38% bracket. At thirty years, the same payout leaves 30 million after deduction, divided by thirty and multiplied by twelve for a converted salary of 12 million won. The tax base lands at 1.6 million, the bottom 6% band.

What sets the tax is not how much you received, but across how many years you earned it.

Fix the years at twenty and move the money instead

Run it the other way and progressivity reappears cleanly. The service-year deduction stays at 40 million won.

Twenty years and a 50 million won payout produce a converted salary of 6 million — inside the fully deducted band, so the tax base is zero. That is where liability starts. Every figure above is national tax only; withholding adds a local income tax of 10% on top. The 20-year, 100 million won case pays 1.12 million plus 112,000 won.

Rolling into an IRP cuts the bill by 30 to 40 percent

Transfer the payout into an Individual Retirement Pension (IRP) account and no tax is withheld at that moment — it is deferred. Draw it later as a pension and you pay less than the originally computed amount. Under Article 129 of the Income Tax Act, summarized by Korea's Easy Law portal, years 1 through 10 of pension withdrawal apply 70% of the retirement tax rate, and year 11 onward applies 60% — discounts of 30% and 40%.

Applied to the 20-year, 100 million won case:

The discount holds only within the annual pension withdrawal limit. Exceed it and the excess is reclassified as a non-pension withdrawal, forfeiting the reduction. Separately, the contributions that earned a tax credit and the investment gains sitting in the same IRP are taxed as pension income rather than retirement income: per the Mirae Asset Investment and Pension Center, 5.5% at ages 55–69, 4.4% at 70–79, and 3.3% from 80. Money in one account can face different rates depending on where it came from. Contribution limits and withdrawal conditions for those accounts are covered in the 9-million-won tax credit structure of yeongeum-jeochuk and IRP, and pre-retirement bonuses follow a different track entirely, laid out in how cash and treasury-share bonuses are taxed.

What to watch

• The service-period date basis — what counts is the period the employer reported, not your own reading of start and end dates. Partial years round up, so a few days can move you across a deduction band.
• Interim settlements and job changes — if you took an interim severance settlement, only the period after it may count. Keep that withholding receipt to argue for aggregation relief.
• The 8-million-won converted-salary line — if (retirement income − service deduction) ÷ years × 12 is at or under 8 million won, the tax base is zero. Check that first.
• The IRP transfer window — even after taking a lump sum, moving it into an IRP within the allowed period can refund tax already withheld. Ask your provider the day the statement arrives.
• The annual withdrawal limit — staying inside it matters more than the size of the discount. Model the yearly limits before setting a drawdown plan.
• The 10% local surtax — confirm whether an online calculator showed national tax only. Your net is 10% lower than that figure.

The conditions under which this arithmetic fails are equally clear. A non-taxable component, an executive severance amount above the statutory ceiling being reclassified as employment income, or aggregation relief on service years all break the tables above. Start with two boxes on the employer-issued retirement income withholding receipt: years of service, and retirement income.

Sources

• National Tax Service — How retirement income tax is calculated
• Easy Law — Retirement pensions
• Mirae Asset Investment and Pension Center — How much tax on retirement pension payouts