Severance Pay Tax in Germany — How the Fünftelregelung Works

Severance pay is a lump-sum payment — and that creates a tax problem in Germany. Without a special rule, the full amount would sit on top of your regular income and push you into higher tax brackets. The Fünftelregelung (§34 EStG) softens this progressivity spike. Our severance pay calculator shows you exactly how much you keep after tax.

What Is Severance Pay in Germany?

Severance pay (Abfindung) is a one-off payment from the employer when an employment relationship ends. There is no general statutory right to severance — exceptions include terminations under §1a KSchG (Protection Against Dismissal Act) and social plans in larger companies. In practice, severance is most commonly agreed in termination agreements (Aufhebungsverträge) or employment court settlements.

The common rule of thumb: 0.5 monthly salaries × years of service. After 10 years at €5,000 per month, that would be €25,000. The actual amount depends on negotiations, tenure, and the strength of each side's legal position.

Why Is Severance Taxed Differently?

Germany’s income tax is progressive: the higher your income, the higher the marginal rate. Someone earning €50,000 a year pays around 32 % on the last euro. Add a €30,000 severance on top and taxable income jumps to €80,000 — pushing the marginal rate toward 42 %.

Without a relief rule, a large chunk of the severance would be taxed at the top rate, even though it is a one-time, extraordinary payment.

The Fünftelregelung (§34 EStG) Explained

The Fünftelregelung treats the severance as if it were spread over five years, reducing the progression effect significantly. The calculation works in three steps:

1. T0: Calculate income tax on regular annual income (without severance).
2. T1: Calculate income tax on regular income plus one-fifth of the severance.
3. Tax on severance: (T1 − T0) × 5

The tax office applies only the marginal rate that arises from adding one-fifth, then multiplies the difference by five. This avoids pushing the full severance into higher brackets at once.

Worked Example: €30,000 Severance on €60,000 Salary

Step	Calculation	Amount
Taxable income (zvE)	€60,000 − €1,266 (allowances) − €11,784 (basic allowance)	€46,950
T0 (tax on zvE)	§32a EStG on €46,950	~€9,828
T1 (tax on zvE + 1/5)	§32a EStG on €46,950 + €6,000	~€11,983
Difference × 5	(€11,983 − €9,828) × 5	~€10,775
Solidarity surcharge	5.5% on €10,775	~€593
Net severance	€30,000 − €10,775 − €593	~€18,632

Without the Fünftelregelung, income tax on the severance would be ~€12,097 — a saving of roughly €1,322.

Solidarity Surcharge (Solidaritätszuschlag)

The solidarity surcharge (Soli) is 5.5 % of income tax. It only applies when total annual income tax exceeds €18,130 for tax class I–II (or €36,260 for class III). Below this threshold, Soli is zero. For high earners, Soli adds to the severance tax burden. See our income tax calculator for a full breakdown.

Church Tax (Kirchensteuer)

Church members pay an additional church tax: 8 % in Bavaria and Baden-Württemberg, 9 % everywhere else, calculated on the income tax amount. On €10,775 income tax on severance, that adds around €969–€970. Whether leaving the church is worthwhile is a personal decision that goes well beyond tax.

How Does Tax Class Affect Severance Tax?

Your tax class at the time of dismissal applies to the severance. Class III (married, higher earner) benefits from Ehegattensplitting and produces a significantly lower tax burden. Class V results in higher tax. See our gross-to-net calculator for more detail on how tax classes work.

Tax Class	Who?	Effect on Severance Tax
I	Single	Standard burden
II	Single parent	Slightly lower (relief amount)
III	Married, higher earner	Significantly lower (splitting)
IV	Married, equal income	Same as class I
V	Married, lower earner	Higher burden
VI	Second job	Highest burden

When Does the Fünftelregelung Save the Most?

The saving is largest when:

• regular annual income falls in the middle range (€20,000–€80,000),
• severance is considerably larger than annual salary,
• adding the full severance would push income into a significantly higher bracket.

At very high incomes (marginal rate already 42 % or 45 %), savings are minimal because even 1/5 of the severance lands in the top bracket. Use our salary calculator to find your current marginal rate.

Severance Pay and Social Security

Since 1 January 2024, severance pay is completely exempt from social security contributions (pension, health, nursing care, and unemployment insurance). You pay no employee contributions on severance — regardless of the amount. Income tax, Soli, and church tax still apply.

Tax Planning Tips

• Control the payment date: Arrange payment in a year when you expect lower regular income (e.g., unemployment or a career break). Lower T0 means the Fünftelregelung saves more.
• Top up your state pension: Voluntary pension contributions (§187a SGB VI) reduce taxable income and are especially attractive for employees close to retirement age.
• Claim it on your tax return: The Fünftelregelung is not applied automatically by employers. Report the severance on Anlage N (line 19) and the tax office applies the rule in your assessment.
• Consider occupational pension contributions: Contributions to a company pension (bAV) or Rürup pension can be deducted as special expenses, lowering your taxable income.