Does Severance Pay Get Taxed in China? 2026 Guide
Yes, but only partially. When your employment in China ends and you receive a one-off severance payment — economic compensation (N, N+1 or 2N), living subsidy or other termination allowances — the part within three times the local average wage of the previous year is exempt from individual income tax (IIT). The excess is not merged into your annual income; instead it is taxed once, separately, using the annual comprehensive income rate table (3%–45%) without any monthly or annual deduction. This guide explains the rule (财税〔2018〕164号, Article 5), how to compute the tax, which payments qualify, and what your employer must withhold.
1. The Rule: 3× Local Average Wage Is Tax-Free
Under MOF & STA Announcement 财税〔2018〕164号, Article 5, a one-off compensation received for termination of the labour relationship — including economic compensation, living subsidies and other allowances — is exempt from IIT up to 3× the local average wage of the previous year. The portion above that threshold is not included in the year's comprehensive income and is taxed separately on the annual comprehensive income rate table:
| Annual taxable excess | Rate | Quick deduction |
|---|---|---|
| Up to ¥36,000 | 3% | 0 |
| ¥36,001 – 144,000 | 10% | 2,520 |
| ¥144,001 – 300,000 | 20% | 16,920 |
| ¥300,001 – 420,000 | 25% | 31,920 |
| ¥420,001 – 660,000 | 30% | 52,920 |
| ¥660,001 – 960,000 | 35% | 85,920 |
| Over ¥960,000 | 45% | 181,920 |
Tax formula: taxable excess = severance − (3 × prior-year local average wage); then tax = taxable excess × rate − quick deduction. No ¥5,000/month basic deduction applies to this excess — it is a standalone one-time calculation.
2. What "Local Average Wage" Means
The exemption threshold uses the average wage of urban employees in the local city/province for the previous year, as published by the local statistics authority. The higher the city's average wage, the larger the tax-free amount. Examples for 2026 planning (previous-year average wage × 3):
| City | Example prior-year average wage (annual) | 3× exemption ceiling |
|---|---|---|
| Beijing | ≈ ¥160,000 | ≈ ¥480,000 |
| Shanghai | ≈ ¥150,000 | ≈ ¥450,000 |
| Guangzhou / Shenzhen | ≈ ¥120,000 | ≈ ¥360,000 |
These are illustrative levels rounded for planning; always use the official figure for your city and year when computing the actual tax.
3. Worked Examples
| Scenario | Severance | 3× ceiling | Taxable excess | IIT |
|---|---|---|---|---|
| Within the ceiling | ¥350,000 | ¥360,000 | 0 | ¥0 — fully exempt |
| Small excess | ¥400,000 | ¥360,000 | ¥40,000 | ¥40,000 × 3% − 0 = ¥1,200 |
| Large excess | ¥800,000 | ¥360,000 | ¥440,000 | ¥440,000 × 30% − 52,920 = ¥79,080 |
Note the marginal effect: in the third example, ¥440,000 of extra severance costs ¥79,080 of tax (≈18% effective on the excess) — still far below the marginal salary-tax rate that would apply if it were paid as wages.
4. Which Payments Qualify — and Which Do Not
- Qualify for the 3× exemption: statutory economic compensation for termination of the labour relationship (N, N+1, 2N under the Labour Contract Law), living subsidies and other one-off termination allowances paid by the employer.
- Do not qualify: non-compete (restrictive covenant) compensation paid monthly is treated as wages and withheld as salary; severance paid in several instalments is still assessed under the same one-off rule in practice when it is compensation for the same termination — confirm the treatment with the employer's withholding.
- Fully exempt: one-off resettlement allowances paid to employees of bankrupt enterprises under statutory bankruptcy procedures (财税〔2001〕157号), and work-injury benefits paid through the social insurance system.
- No seniority averaging: the old pre-2019 rule (国税发〔1999〕178号) that divided the payment by years of service and taxed it like monthly wages was abolished; 164号 applies to the whole excess amount at once.
5. Foreigners and Non-Residents
The 3× exemption and the separate excess computation apply to any individual terminating employment with a China employer — Chinese nationals, foreigners, residents and non-residents alike. The policy does not distinguish by residency status. For expats, the practical questions are usually two: (1) how much statutory compensation did you actually get (use the China Severance Pay Calculator), and (2) whether your termination pay should be filed as part of your tax residency picture or the annual reconciliation — the answer: the exempt part is not in the reconciliation, and the taxable excess is computed separately, not merged.
6. Who Withholds and Reports
The employer is the withholding agent. Under STA Announcement 2018 No. 61, the employer must withhold the IIT on the taxable excess and file a full withholding return with the tax authority by the 15th of the month following payment. The exempt portion is not reported as taxable income.
7. FAQ
Is severance pay taxable in China?
Partly. The part within 3× the previous year's local average wage is exempt from IIT. The excess is taxed separately on the annual comprehensive income rate table (3%–45%) — it is not merged into your annual income and does not participate in the March–June annual reconciliation.
How much severance is tax-free in China?
Three times the local average wage of the previous year, per the city/province statistics — commonly around ¥360,000–¥480,000 for tier-1 cities in recent years. Everything above that amount is taxable in a single separate calculation.
Does the taxable excess use the monthly ¥5,000 deduction?
No. The excess is computed independently on the annual table without the ¥5,000/month basic deduction or any special additional deductions. Only the marginal rate table applies.
Do foreigners get the same severance exemption?
Yes. The rule applies to any employee ending employment with a China employer regardless of nationality or residency status, including non-residents. There is no separate treatment for expats.
Is non-compete compensation covered by the exemption?
Generally no. Non-compete (restrictive covenant) compensation paid monthly is treated as wages and withheld under the salary rules; the 3× exemption is designed for one-off termination compensation.