One-fifth rule (Fünftelregelung) for severance pay: tips and tricks

One-fifth rule for severance pay: If there is a mutual separation between employer and employee by means of a termination agreement, or if the employment relationship ends as a result of a court settlement in the course of unfair dismissal proceedings, severance pay is often the result. The employee has to pay tax on this. This is because severance pay in Germany is subject to income tax, and in principle in the full amount. Due to the progression effect and the concentration of income in one year, almost half of the severance pay can end up at the tax office – in the case of high income. This effect is (somewhat) mitigated by the ‘fifth rule’, which we will explain in the following blog article. Incidentally, the tax burden on a severance payment can also be calculated conveniently using our tax calculator.

Prerequisite for the applicability of the fifth rule for severance payments

Extraordinary income is somewhat better off due to the fifth rule. However, the following conditions must first be met in order to claim the fifth rule:

1. Compensation for lost payments: The severance payment must be paid as compensation for the loss of income in accordance with § 24 No. 1 EStG, i.e. it is intended to compensate for lost payments.
2. Consecutive amount: As a rule, the severance pay is to be paid in one lump sum. It is permitted to distribute the payment over two consecutive tax assessment periods, but one part may not exceed 10% of the total severance pay and the remaining amount must account for at least 90% of the total severance pay.
3. Accumulation of income: This is the case when the sum of regular income and severance pay exceeds the income that would have been earned had the employment relationship been continued.

Example of the one-fifth rule

To calculate taxes on severance pay according to the fifteenth rule, proceed as follows:

1. In the first step, the income tax on the taxable income is calculated without including the severance pay.
2. In the second step, the regular taxable income is increased by one fifth of the severance pay and the tax burden is determined on this basis.
3. In the third step, the amount resulting from the difference between the two tax amounts is determined. This is then multiplied by five, which corresponds to the tax reduction for the severance payment.
4. Finally, the taxes from steps 1 and 3 are added up to determine the total tax amount for the year in which the severance payment is made.

Example of the one-fifth rule for severance pay

Background: Ms Schmidt is single and works as a salaried employee. She has an annual income of €40,000 (refers to 2023) and receives a severance payment of €60,000 from her employer.

Step 1:	Income tax on €40,000	8.452 €
Step 2:	Income tax for €52,000 (€40,000 + 1/5 of the severance payment)	12.930 €
Step 3:	Difference in tax amounts	4.477 €
Step 4:	Difference x five (5 × 4,477)	22.385 € *

With our tax calculator, you can easily calculate your net severance pay or the tax on your severance pay.

Five-year rule in tax assessment

Until 2024: Application in the wage tax deduction procedure

Employees do not normally have to actively seek to apply the one-fifth rule. It is the employer’s responsibility to automatically take this tax regulation into account when paying out a severance payment, provided that the employee benefits from tax relief as a result. The correct application of the one-fifth rule should be apparent from the payroll.

From 2025: fifth rule only in the context of the tax return

The ‘Growth Opportunities Act’ has abolished the fifth rule in the wage tax deduction procedure from 2025. The ‘Growth Opportunities Act’ was passed by the Bundesrat (Federal Council) on 22 March 2024 and published in the Federal Gazette on 27 March 2024. Among other things, it includes the deletion of the so-called ‘one-fifth rule’ in the wage tax deduction procedure for the first time for the 2025 wage tax deduction.

For employees, this does not have to result in any tax disadvantage. They can request the application of the one-fifth rule when filing a tax return as part of the assessment – but they must not forget to do so.

For employers, on the other hand, the mandatory application of the fifth rule in the deduction of wage tax – especially in borderline cases – provides real relief from liability risks. In the past, wage tax audits have in some cases found that the conditions for reduced taxation had not been met. The consequence of this was a so-called wage tax liability on the part of the employer. The ‘Growth Opportunities Act’ eliminates this risk.

You can find more information about the taxation of severance pay in our 10 tips on how you can save taxes on severance pay. By the way: with our tax calculator, you can conveniently calculate your net severance pay and the tax on your severance pay.