Salary & Taxes

Severance pay and tax in Germany: the one-fifth rule explained

Fully taxable but free of social contributions: how the one-fifth rule works and what changed in 2025.

Updated on May 25, 2026 Topic: Gross, net, income tax, severance, VAT

What you are calculating

A severe payment is often a large one-off amount – and immediately raises the question of how much remains after tax. These calculators help:

Calculator Typical question
Severance pay calculator How much of my severance remains after tax?
Income tax calculator How high is my tax on annual income?
Gross to net calculator How much net remains from my regular salary?
Unemployment benefits calculator What ALG I am entitled to after the job?

Principle: fully taxable, but free of social contributions

A severe payment is compensation for the loss of a job. For tax purposes it counts as employment income and is fully subject to income tax. But it is free of social contributions: a genuine severance for ending the employment relationship carries no health, care, pension or unemployment insurance contributions. That is an important difference from regular salary.

The problem is progression: because the severe flows in a single year, it pushes taxable income upward – often into the top tax rate. Without relief, a large part of the severity would be taxed heavily.

The one-fifth rule in principle

This is exactly where the one-fifth rule (section 34 of the Income Tax Act) comes in. It treats the severity as "extraordinary income" and calculates as if the amount were spread over five years:

  1. Calculate tax on the normal annual income without the severity.
  2. Calculate tax on the normal income plus one fifth of the severity.
  3. The difference is the tax on one fifth.
  4. This difference times five is the tax on the entire severance.

The trick: only one fifth meets the progression, then the result is multiplied by five. If your other income is low, more of the severity “fits” into lower tax rates – the benefit is large. If you are already at the top rate, the rule helps little or not at all.

Example

Suppose the taxable annual income without the severance is €30,000 and the severance is €50,000.

Step Value (simplified)
Tax on €30,000 about €4,700
Tax on €30,000 + €10,000 (one fifth) about €6,600
Difference (tax on one fifth) about €1,900
Tax on the severity (× 5) about €9,500

Without the one-fifth rule the severance would sit fully on top and be taxed mostly at the high marginal rate – the tax would be noticeably higher. The exact figures depend on the tax year; the Severance Pay Calculator models the logic transparently.

New since 2025: only through the tax return

Until 2024 employers could apply the one-fifth rule directly in payroll. Since 2025 this has been abolished. The employer first withholds wage tax without the relief – so the net amount in the payout month is lower.

You recover the benefit through your income tax return: the tax office applies the one-fifth rule during assessment and refunds the overpaid tax. It is therefore important to report the severity correctly in the return.

What makes the benefit larger

  • Low other income in the payout year – for example after a longer period of unemployment or a mid-year job loss.
  • Concentration of income: the severity must lead to a genuine bundling in one year for section 34 to apply.
  • Deliberate timing of the inflow where contractually possible – for example payout in a lower-income year.

Severance and unemployment benefits

A severity generally does not reduce unemployment benefit (ALG I), as long as the employment ends properly. It can be different with a termination agreement carrying a blocking period or with early termination without observing the notice period. The unemployment benefits calculator shows how high your ALG I would be.

Common misconceptions

  • "Severance payments are tax-free." This was partly true in the past but has not been applied for years – they are fully taxable.
  • "I have to apply for the one-fifth rule." You only need to report the severity correctly in the tax return; the tax office automatically checks the more favorable option.
  • "I pay social contributions on the severance." No – a genuine severance for job loss is contribution-free.

Conclusion

A severance is fully taxable but free of social contributions – and the one-fifth rule can significantly lower the tax burden, especially with low other income. Since 2025 the benefit applies only through the tax return. Run your case through the Severance Pay Calculator and check with the income tax calculator how the severity affects your whole year.

Sources

FAQ

Frequently asked questions on this topic

Is severance pay taxable in Germany?

Yes. A severance payment counts as employment income and is fully subject to income tax. However, it is usually free of social contributions, so no health, pension, care or unemployment insurance is due.

What is the one-fifth rule?

A tax relief for extraordinary income under section 34 of the German Income Tax Act. The calculation pretends the severity is spread over five years. This dampens the jump into higher tax rates and can lower the tax.

Has anything changed with the one-fifth rule?

Yes. Since 2025 employers no longer apply the one-fifth rule automatically in payroll. You now claim the benefit through your income tax return.

Is the one-fifth rule always worth it?

Not in every case. The benefit is large when your remaining annual income is low, and small to none when you are already at the top tax rate. The tax office automatically applies whichever option is better for you.

Matching calculators

Continue calculating