Proposed changes under the 2027 Finance Bill and Social Security Financing Bill
The proposed changes under the 2027 Finance Bill and Social Security Financing Bill regarding the termination of employment contracts warrant particular attention. They notably concern the tax and social security rules applicable to termination payments.
1. Income tax
Today, severance indemnities are tax-exempt up to certain thresholds, which vary depending on the type of termination. Article 2 of the Finance Bill would amend Article 80-duodecies of the General Tax Code: such payments would only be exempt up to one Annual Social Security Threshold (PASS) threshold and would become taxable above that amount. The PASS used would be that in force on the date of payment, i.e. €48,060 in 2026 (€48,900 in 2027). The measure applies to redundancies, individual mutual terminations (ruptures conventionnelles) and compulsory retirement.
More worryingly, this would also apply to payments made under a collective redundancy (plan de sauvegarde de l’emploi – PSE), which are currently fully exempt with no upper limit (General Tax Code, Article 80 duodecies, 1, 2°), as well as those made under collective contractual terminations (RCC), mobility leave, as well as compensation awarded by a judge and the lump-sum settlement paid following labour tribunal conciliation.
2. Social security contributions and CSG-CRDS
Today, severance indemnity is exempt from social security contributions up to two PASS, i.e. €96,120 in 2026. CSG-CRDS is due on the portion above the statutory or collective agreement amount, or on the portion subject to contributions if that is higher.
Under Article 6 of the PLFSS, contributions and CSG-CRDS would share a single exemption cap of one PASS, whatever the type of termination. This cap would be set independently of the tax treatment. Payments would remain fully liable from the first euro above 10 PASS for employees and 5 PASS for corporate officers, with these thresholds assessed on all termination payments combined.
The bill expressly covers amounts awarded by a court or agreed in a settlement, including damages for a separate harm.
3. Timing
Social security: the PLFSS would apply to payments made in connection with terminations taking effect on or after 1 January 2027.
Income tax: the Finance Bill contains no equivalent provision. As drafted, the new tax cap could therefore apply as early as 2026 income tax, including to termination payments already received this year. This outcome, which most likely results from an oversight, would seriously undermine the legal certainty of terminations already concluded. Parliament should correct it promptly by aligning the effective date of the tax measure with that of the social security measure.
Consequences to anticipate
The largest indemnities would be hit hardest. Conversely, a total indemnity below one PASS that includes an above-statutory portion could be treated more favourably than today for CSG-CRDS purposes.
For PSEs under negotiation, or where departures are spread between late 2026 and 2027, the effective date of each termination will be decisive for social security purposes. The payment date may also be decisive for income tax.
As regards settlement payments, the Government intends to subject compensation for the seperate employee’s harm to social security contributions and levies on the same terms as other payments made on termination of the employment contract. Under current case law, such amounts are fully exempt from contributions, provided the employer shows that they are compensatory in nature. According to the Government, the aim of the measure is to “prevent the risk of optimisation arising from the characterisation of part of settlement payments as damages”.
To be continued…