In short
In Germany, severance pay is fully taxable, but social security contributions are usually not payable. If it is paid to you in one calendar year and you thereby receive more than you would have earned without the separation, the one-fifth rule (Fünftelregelung) under Sec. 34 EStG can reduce the tax. Since 2025, the employer no longer takes it into account in the wage tax deduction; you only get the benefit through your tax return.
Key points
- For tax purposes, severance is employment income: income tax and, where applicable, the solidarity surcharge and church tax are payable. There is no longer a tax allowance for severance.
- The one-fifth rule softens the progression. It helps most with middle incomes and large severance payments, and often not at all with high incomes.
- As a rule, it requires the severance to be paid out in a single calendar year. Instalments over several years can cost you the benefit.
- When the severance is due and what is paid alongside it is set out in the termination agreement or settlement. That is an employment law question with tax consequences.
- Recht 24/7 reviews the contract, the amount and the payment date from an employment law perspective at a fixed price. Your personal tax calculation is done by a tax adviser or an income tax assistance association.
Contents
- Do I have to pay tax on severance?
- What percentage of tax is paid on severance?
- The one-fifth rule explained simply
- What has changed since 2025?
- What is left net? Example table
- Saving tax: what to settle in the termination agreement or settlement
- Declaring severance in your tax return
- Severance and unemployment benefit
- FAQ
Do I have to pay tax on severance?
Yes. For tax purposes, severance is compensation for lost or future lost income (Sec. 24 no. 1 (a) EStG) and counts as income from employment. Your employer withholds wage tax on payment and, where applicable, the solidarity surcharge and church tax. The solidarity surcharge is only payable if your income tax exceeds an exemption limit, in 2026 €20,350 for individual assessment (Sec. 3 (3) SolZG).
Social security contributions are usually not payable on genuine severance for the loss of the job, because it is not pay for work performed. It is different for payments that are only called severance but are in reality wages, such as salary until the end of the notice period or payment in lieu of holiday.
Some churches waive part of the church tax attributable to severance on application.
Is severance tax-free?
No. There used to be allowances for severance (Sec. 3 no. 9 EStG, old version), but they were abolished years ago. Today, only what you have paid specifically into a company pension scheme is tax-free, and only within limits (see below). If you are offered "tax-free severance", you should therefore question this carefully.
What percentage of tax is paid on severance?
There is no fixed tax rate for severance. How much tax is payable depends on your other taxable income in the year of payment, on the amount of the severance and on whether the one-fifth rule applies. Income tax rises with income from 0% (up to the basic allowance of €12,348 in 2026) to the top tax rate of 45% (Sec. 32a (1) EStG). No euro of the severance can be subject to more than 45% income tax; the solidarity surcharge and church tax may be added.
In the simplified example table below (single, 2026 basic tariff, without solidarity surcharge and church tax), the income tax on the severance with the one-fifth rule is between 28.5% and 38.6% of the severance amount. With low other income, the share can be considerably lower; with high income, higher.
The one-fifth rule explained simply
Income tax is progressive: the higher the income, the higher the tax rate on each additional euro. If a large one-off payment falls into a single year, it slips into high tax rates, even though it replaces income for a longer period. The one-fifth rule partly compensates for this.
The idea: the tax office calculates as if you had received only one fifth of the severance in addition. The tax attributable to this fifth is then multiplied by five (Sec. 34 (1) sentence 2 EStG). In this way, the severance is taxed at the rate that would apply to one fifth, not at the rate for the full amount.
Requirements of the one-fifth rule
- Compensation: The severance is paid as a replacement for lost or future lost income, typically for the loss of the job (Sec. 24 no. 1 (a), Sec. 34 (2) no. 2 EStG).
- One calendar year: The compensation is in principle paid to you in a single year.
- Bunching of income: In the year of payment, you receive more in total than you would have earned in that year had the employment continued. If the severance exceeds the wages you lose until the end of the year, this is usually met.
How the tax office calculates
Example (simplified, no tax advice): single, 2026 basic tariff, other taxable income €45,000, severance €20,000. Without solidarity surcharge and church tax.
| Step | Calculation | Amount |
|---|---|---|
| 1. Tax on the other income | income tax on €45,000 | €8,835 |
| 2. One fifth of the severance | €20,000 divided by 5 | €4,000 |
| 3. Tax including the fifth | income tax on €49,000 | €10,198 |
| 4. Difference | €10,198 minus €8,835 | €1,363 |
| 5. Tax on the severance | €1,363 times 5 | €6,815 |
| 6. Total income tax | €8,835 plus €6,815 | €15,650 |
| 7. For comparison without the one-fifth rule | income tax on €65,000 | €16,205 |
| 8. Benefit from the one-fifth rule | €16,205 minus €15,650 | €555 |
In this example, €13,185 of the severance remains before solidarity surcharge and church tax. The tax amounts are calculated using the formula in Sec. 32a (1) EStG for 2026, with income and tax each rounded down to full euros.
Who benefits from the one-fifth rule, and who does not?
- Worthwhile: with medium other income and high severance, and especially if your other income in the year of payment is low, for example because you no longer receive wages from the spring onwards.
- Of little benefit: with small severance payments. In the examples below, it only brings around €140 for severance of €10,000.
- Usually no benefit: if your other taxable income is already in the range of the constant tax rate of 42%, i.e. from €69,879 in 2026 (Sec. 32a (1) sentence 2 no. 4 EStG). One fifth is then taxed in the same way as the full amount, as long as other income and severance together do not exceed €277,825 (Sec. 32a (1) sentence 2 no. 5 EStG).
If you receive unemployment benefit in addition to the severance, it affects the tax rate through the progression clause (Sec. 32b EStG). This is another reason why the calculation for your specific year belongs in the hands of a tax adviser.
What has changed since 2025?
Until the end of 2024, the employer could already take the one-fifth rule into account in the wage tax deduction. Since 1 January 2025, this is no longer provided for. The employer therefore withholds wage tax without a reduction.
Is the one-fifth rule still possible from 2025? Yes. It still applies, but is only applied in the income tax assessment. For you, this means: more tax is withheld in the year of payment, and the refund comes with the tax assessment in the following year. Plan your cash flow accordingly, especially if you want to use the severance to bridge a period without income.
What is left net? Example table
Simplified, no tax advice: single, 2026 basic tariff, income tax only. "Other income" is the taxable income in the year of payment without the severance. "Tax" is in each case the additional income tax arising from the severance. Social security contributions are not included.
| Severance | Other income | Tax without one-fifth rule | Tax with one-fifth rule | Net with one-fifth rule | Tax share |
|---|---|---|---|---|---|
| €10,000 | €30,000 | €2,992 | €2,850 | €7,150 | 28.5% |
| €25,000 | €30,000 | €8,130 | €7,265 | €17,735 | 29.1% |
| €50,000 | €30,000 | €18,247 | €14,960 | €35,040 | 29.9% |
| €100,000 | €30,000 | €39,247 | €31,655 | €68,345 | 31.7% |
| €10,000 | €50,000 | €3,685 | €3,545 | €6,455 | 35.5% |
| €25,000 | €50,000 | €9,816 | €8,995 | €16,005 | 36.0% |
| €50,000 | €50,000 | €20,316 | €18,425 | €31,575 | 36.9% |
| €100,000 | €50,000 | €41,316 | €38,580 | €61,420 | 38.6% |
The solidarity surcharge and church tax can reduce the net amount further. How high your severance could be is shown in our guide on severance pay by years of service; you can calculate your own figures with the severance calculator [REDAKTION: Link auf abfindungsrechner, sobald veröffentlicht]. How severance comes about in unfair dismissal proceedings is explained in our guide on the unfair dismissal claim.
Saving tax: what to settle in the termination agreement or settlement
Whether the one-fifth rule applies and in which year the severance is taxed is often decided when the contract is drawn up. These points have to be settled under employment law. How they affect your tax in your case should be clarified in parallel with a tax adviser.
Payment in the following year
Tax is charged in the year of receipt (Sec. 11 (1) EStG). If your employment ends at the end of the year and you are likely to have less income in the next year, it may be worthwhile making the severance due only in January.
Example (simplified, no tax advice, single, 2026 basic tariff, without solidarity surcharge and church tax): €50,000 severance. With €50,000 other income in the year of payment, €18,425 income tax is attributable to the severance with the one-fifth rule. With only €15,000 other income in the following year, it would be €12,075, i.e. €6,350 less. Unemployment benefit in the following year is not taken into account here and can reduce the benefit through the progression clause.
What to watch out for:
- Settle the due date expressly: Fix the due date or payment date in the contract, not just "on termination".
- Consider the insolvency risk: The later the payment, the longer you bear the risk that the employer can no longer pay.
- Not too early, not too late: Severance that has already been paid out in the current year can no longer be moved to the following year.
No instalments over several years
If the severance is spread over two or more years, there is usually no bunching of income, and the one-fifth rule does not apply to the entire amount. According to the case law of the Federal Fiscal Court (Bundesfinanzhof), a relatively small partial payment in another year may be harmless. Only payment in one amount is certain. You should therefore not accept instalments proposed by the employer for cash flow reasons without checking them.
Separate severance and other payments clearly
A termination agreement or settlement often contains several payments side by side. They are treated differently for tax and social security purposes:
- Severance: compensation for the loss of the job, one-fifth rule possible, usually free of contributions.
- Salary until the end of the notice period, bonuses, overtime: normal employment income, fully subject to wage tax and contributions.
- Payment in lieu of holiday: employment income, not part of the severance. How it is calculated is explained in our guide on remaining holiday on dismissal.
Each payment should appear in the contract with its own amount and its own description. Simply relabelling wage claims as higher severance is risky and can lead to back claims in an audit.
Payment into a company pension scheme
Part of the severance can be paid tax-free into direct insurance, a pension fund (Pensionskasse) or a Pensionsfonds on the occasion of the termination, at most 4% of the contribution assessment ceiling of the general pension insurance for each calendar year of the employment, for a maximum of ten calendar years (Sec. 3 no. 63 sentence 3 EStG). Whether this makes sense depends on your pension provision and is a matter for tax or financial advice. It must be expressly settled in the contract.
Declaring severance in your tax return
Your employer shows the severance separately on the wage tax certificate. In your tax return, you enter it in Annex N (Anlage N) under compensation taxed at a reduced rate. Only then does the tax office apply the one-fifth rule.
You can get help with your tax return from a tax adviser or, as a member, from an income tax assistance association. Recht 24/7 does not prepare tax returns.
Severance and unemployment benefit
Severance is not offset as income against unemployment benefit. Two rules can, however, mean that you initially receive no unemployment benefit:
- Suspension with a shortened notice period: If the employment ends in return for severance earlier than it would have ended with the employer's ordinary notice period, the entitlement is suspended until the end of that period, for at most one year (Sec. 158 SGB III). Which notice period applies to you is explained in our guide on notice periods for employees.
- Benefit suspension: If you terminate the employment yourself, for example through a termination agreement, without good cause, a benefit suspension (Sperrzeit) of up to 12 weeks may be imposed (Sec. 159 SGB III). When there is good cause is explained in our guide on the termination agreement.
Unemployment benefit itself is tax-free, but through the progression clause it increases the tax rate on your other income (Sec. 32b EStG).
Checklist: severance received, what to do now
- Have the agreement or settlement reviewed before signing: gross amount, due date, payment in one amount, separation from salary and payment in lieu of holiday.
- Clarify with your tax adviser whether payment in the following year or a payment into a pension scheme makes sense for you.
- Register as a jobseeker with the employment agency (Agentur für Arbeit) in good time and clarify whether a suspension of benefit or a benefit suspension is likely.
- Check the payslip for the month of payment: is the severance shown as such?
- Keep the wage tax certificate.
- In the following year, file your tax return with Annex N to obtain the one-fifth rule.
FAQ
How is severance taxed?
Severance is subject to income tax; the employer withholds wage tax on payment. If it meets the requirements of Sec. 34 EStG, the tax office applies the one-fifth rule in the tax return, which softens the progression. Social security contributions are usually not payable on genuine severance.
What percentage of tax is paid on severance?
There is no fixed rate. The share depends on other income in the year of payment and on the amount of the severance. In our simplified example table (single, 2026 basic tariff, without solidarity surcharge and church tax), the income tax on the severance is between 28.5% and 38.6%. No euro is subject to more than 45% income tax.
Is the one-fifth rule applied automatically?
Not in the wage tax deduction since 2025. The tax office takes it into account in the income tax assessment if the severance is declared as compensation in the tax return. Without a tax return, the higher wage tax deduction remains.
Is the one-fifth rule still possible from 2025?
Yes. Only its application by the employer in the wage tax deduction has been dropped. The reduced taxation under Sec. 34 EStG still applies and is granted through the tax return.
When is the one-fifth rule not worthwhile?
With small severance payments, the benefit is small, and if your other taxable income is already in the range of the constant tax rate of 42%, from €69,879 in 2026, it usually brings nothing. If the severance is spread over several years, it may not apply at all.
Is severance free of tax or social security contributions?
It is not tax-free; the former allowances have been abolished. Social security contributions are usually not payable on genuine severance for the loss of the job. This does not apply to wage components that are labelled as severance in the contract.
Is it worthwhile having the severance paid only next year?
It can be worthwhile if your other income is considerably lower next year. The due date must be settled in the contract before the severance is paid out. In return, you bear the risk that the employer does not pay for longer, and unemployment benefit can reduce the benefit. Work this out with a tax adviser.
How much tax do I pay on €100,000 severance?
That depends on your other income. In our simplified example with the one-fifth rule (single, 2026 basic tariff), it is €31,655 income tax with €30,000 other income and €38,580 with €50,000 other income, in each case without solidarity surcharge and church tax. A tax adviser will calculate your exact tax.
Terms used in this guide
About the author
Dr. Georg Schröder, LL.M.
Dr. Georg Schröder is a lawyer and writes the guides of Recht 24/7. He explains legal questions so that you can follow them without legal training, and he reviews every guide before it is published.
View author profile
