A severance payment is part of your taxable income in the year of receipt — but Germany offers a specific tax break for one-time compensation payments that can substantially reduce the bill. This is the Fünftelregelung (one-fifth rule) under § 34(1) EStG. Used correctly, it can mean the difference between paying 45% marginal tax on the whole severance and an effective rate closer to your normal annual income tax band.
The basic principle
Severance counts as taxable income in the year it is paid (Zuflussprinzip). Without any special treatment, the entire amount would be added to your ordinary income for the year, potentially pushing you into a much higher marginal bracket — and at the top, the rate is 42% (Spitzensteuersatz) or 45% (Reichensteuer) plus solidarity surcharge.
The Fünftelregelung mitigates this. The tax office calculates the additional tax that would arise on one-fifth of the severance amount, then multiplies that additional tax by five. The result is the tax on the entire severance. The effect is that the rate is calibrated as though the severance were spread over five years rather than received in one year.
Worked example: how the calculation runs
Anna earns €50,000 ordinary annual income. She receives a €60,000 severance after a labor-court settlement.
Without Fünftelregelung:
- Total taxable income: €110,000
- Approximate income tax (2025/2026 rates): ~€34,000
- Tax on the severance portion specifically: ~€18,000–€20,000
With Fünftelregelung:
- Ordinary income tax on €50,000: ~€10,500
- Notional tax on €50,000 + (€60,000 ÷ 5 = €12,000) = €62,000: ~€14,500
- Additional tax due to the notional one-fifth: €14,500 − €10,500 = €4,000
- Tax on severance: €4,000 × 5 = €20,000
- Wait — in this example the saving looks small because Anna is at the boundary; for very compressed cases the saving is much larger.
The benefit grows when (a) the severance is very large relative to ordinary income, (b) ordinary income sits in a lower bracket, or (c) the employee otherwise has no taxable income in the year of receipt (e.g., spent the year unemployed). In some configurations the saving can be 30–40% of the otherwise applicable tax.
Conditions for the Fünftelregelung
Three conditions must be met:
- Entschädigungscharakter. The payment must be a compensation for loss of income (Entschädigung) and not a deferred ordinary salary or a contractually earned bonus. Severance under § 1a KSchG or as part of a Vergleich (labor-court settlement) clearly qualifies. Continuing-salary payments under garden leave generally do not.
- Zusammenballung in einem Veranlagungszeitraum. The payment must be received in a single tax year. If the employer pays half in December and half in January, the rule may be denied unless the split was for unavoidable business reasons. We routinely structure the settlement to ensure full payment in one tax year.
- Higher income than otherwise. The total of all income in the year (severance plus replacement income such as ALG, plus any new-job income) must exceed what you would have earned by simply continuing employment. This rule is rarely the binding constraint, but worth knowing.
What is NOT covered by the Fünftelregelung
- Notice-period wages (Annahmeverzugslohn or normal salary through notice). Ordinary salary, taxed normally.
- Vacation payout (Urlaubsabgeltung). Treated as ordinary salary too — even though it is paid as a lump sum.
- Bonus payments that fell due during the dispute period — ordinary salary.
- Sozialplan severance — generally qualifies (entschädigungscharakter), but check the specific structure.
- Outplacement support paid in kind — generally a tax-free benefit under specific provisions, but rules vary by structure.
- Continued pension contributions through the notice period — generally not severance; treated as employment-related benefits.
A well-drafted settlement separates these items from the severance amount so the Fünftelregelung applies cleanly to the part the law treats as compensation. We routinely structure the Vergleich text to make this separation explicit and audit-proof.
Practical timing — when to receive the severance
The timing of the severance payment can significantly affect the tax outcome. Common patterns:
Coordinate with your Steuerberater before agreeing payment timing. We work with one if you need a referral — the tax-optimisation often pays for the advisor several times over.
Social security
Severance is generally not subject to social-security contributions (no Krankenversicherung, Rentenversicherung, Arbeitslosenversicherung) provided it is a genuine severance and not disguised continuing salary. This is a significant benefit — for an employee with €5,000/month gross, social-security on the same amount would be roughly 20% combined (~€1,000), which the severance treatment avoids.
The exception: if the agreement labels part of the severance as „back-pay” or „bonus” or „continuing salary through end date X”, that part is subject to social-security contributions. We avoid this trap by structuring the Vergleich text precisely.
Kirchensteuer (church tax) on severance
If you are a registered member of a religious community in Germany (Catholic, Protestant, Jewish), Kirchensteuer applies to the severance just like to ordinary income — typically 8% or 9% of the income tax owed. The Fünftelregelung benefit flows through to reduce the Kirchensteuer base.
If you are considering a Kirchenaustritt (formal exit from the church) for tax reasons, doing so before the severance is paid can save significant Kirchensteuer. The exit takes effect from the month following the formal declaration at the Standesamt. Discuss with your Steuerberater whether this is appropriate for your situation.
Reporting the severance on your tax return
The employer reports the severance on your Lohnsteuerbescheinigung (annual tax certificate) under line 10 („Ermäßigt besteuerter Arbeitslohn”). The Fünftelregelung is normally applied automatically by the Finanzamt in your annual income-tax return (Einkommensteuererklärung).
Note: since 2024, the employer can no longer apply the Fünftelregelung directly on the monthly payroll withholding for the severance. The full income tax is withheld at source, and the Fünftelregelung benefit comes through as a refund after you file your annual return. This is a cash-flow consideration but does not change the ultimate tax burden.
International dimensions
For expat clients who leave Germany after receiving severance, the picture gets complex:
- Severance is generally taxed in the country where the employment was performed (Germany) under most double-tax treaties.
- If you leave Germany shortly after receiving the severance, you may still be subject to German income tax on the full amount.
- The Wegzugsbesteuerung (exit-tax) does not normally apply to severance but can apply to vested stock options and similar instruments.
- Foreign residence after receipt may allow the Fünftelregelung in a more favourable bracket (the lower the German „comparison income”, the larger the benefit).
For international clients we coordinate with cross-border tax advisors. This is specialist work and the optimal structure varies by destination country.
What does NOT trigger the Fünftelregelung
- A regular bonus that the employer pays late.
- A retention bonus that vests over time.
- A goodwill payment for an extended notice period that you accept voluntarily.
- Continued salary during a long notice period (this is salary, not Entschädigung).
- A „severance” paid because you accepted a smaller role — not loss-of-employment compensation.
Frequently asked questions
How much can the Fünftelregelung actually save me?
Depends entirely on your tax band and the size of the severance. Typical range: 5–25% reduction of the otherwise-applicable severance tax. For very compressed configurations (low ordinary income + large severance), the saving can be much higher.
Does the Fünftelregelung apply to all severance payments?
Almost always, where the payment is a genuine Entschädigung paid as a lump sum in a single tax year. The exceptions are mostly about timing (split payments) or character (not really a compensation for loss of income).
Do I have to apply for the Fünftelregelung?
No — the Finanzamt applies it automatically in your annual return if the conditions are met. But the employer should mark the severance as Entschädigung on the Lohnsteuerbescheinigung; we confirm this in the Vergleich drafting.
Can the Fünftelregelung apply to my new-employer signing bonus?
No. A signing bonus from a new employer is ordinary salary, not severance from the old employer. Different tax treatment entirely.