How much of your severance do you keep?

How is a severance payment taxed in Germany?

A severance payment is fully subject to German income tax as employment income. The real burden comes not from a special rate but from progression.

• No tax-free allowance since 2006; in return, social-security contributions are generally not due on a genuine severance for the loss of your job.
• The severance lands on top of your other income in the payout year, so a large share of it is taxed at 42 % or 45 %.
• Two statutory levers counter this: the one-fifth rule (§ 34 EStG) and, on a much larger scale, the investment deduction (§ 7g EStG). The calculator above puts both side by side.

What is the one-fifth rule (§ 34 EStG)?

The one-fifth rule is a tariff relief for extraordinary income: the tax is calculated as if the severance had accrued evenly over five years. In three steps:

1. Tax on your other taxable income, without the severance.
2. Tax on that income plus one fifth of the severance.
3. The difference times five, added to the tax from step 1.

Example (tax year 2025, single assessment, income tax only): with 40,000 € of other income and a 100,000 € severance, the tax is 47,888 € without the rule and 42,795 € with it, a saving of roughly 5,100 €.

When does the one-fifth rule help a lot, and when barely at all?

The lower your other income in the payout year, the stronger the effect. At the top rate it almost entirely evaporates.

• Low other income: full effect, because one fifth of the severance still falls into the lower tariff brackets.
• Already at the top rate: barely any effect, because that fifth is taxed at 42 % or 45 % too and multiplying by five cancels the advantage.
• Exactly in that situation the second lever bites: an investment deduction lowers your other income and strengthens the one-fifth rule along with it.

How does an investment deduction (§ 7g EStG) reduce tax on a severance?

With an investment deduction you deduct up to 50 % of the cost of a planned business investment, capped at 200,000 € per business, from your taxable income before the acquisition.

• Claimed in the severance year, it lowers your other income precisely when your marginal rate is highest, and improves the starting point for the one-fifth rule. Conditions: Investitionsabzugsbetrag: all §7g EStG requirements, and who can use it, worked example: IAB under §7g EStG: example calculation for battery storage.
• It requires a business with trading income, which employees can also create: typically a sole proprietorship for a single investment, or a GbR partnership for a co-investment.
• How far the refund reduces the equity actually tied up is calculated in How much equity is actually required?.

The order of magnitude is typical: with high other income the one-fifth rule alone saves a few thousand euros, while combining it with an investment deduction moves the result by a factor of ten. The deduction must lead to a real investment within three years, otherwise it is reversed with interest; the consequences are set out in Reversing the IAB: what happens if you don't invest, deadlines, interest, ways out.

What other levers exist with a severance payment?

• Time the payout: if the severance arrives in January of the following year, it meets a lower level of other income and the one-fifth rule works harder.
• Secure the bunching: the relief generally requires the payment to accrue within one calendar year; instalments can cost it entirely.
• Use pension contributions: payments into a Rürup basic pension are deductible as special expenses and lower your other income.
• Plan for the progression proviso: unemployment benefit in the same year raises the rate applied to your other income.
• Further reading: Investing a severance payment tax-efficiently: the fifth rule, the IAB and the energy investment on reinvesting into an energy project, Legally reducing your tax: the most effective strategies for an overview of legal structuring room and its limits.

How does this severance calculator work?

• Tariff: § 32a EStG implemented exactly to the statutory formula for 2025 and 2026 (basic allowance 12,096 € and 12,348 €), with income splitting for joint assessment.
• One-fifth rule: § 34 (1) EStG including the special case of negative remaining income.
• Surcharges: solidarity surcharge with exemption limit and phase-in zone (§§ 3, 4 SolzG), church tax at 8 % or 9 % of income tax.
• Investment deduction: reduces your other taxable income.
• Not included: work-related expenses, special expenses, pension contributions, the progression proviso, the special-expense effect and the capping of church tax, and any check of the § 7g conditions.

“Net from the severance” is the severance less the tax that the respective scenario adds on top. The calculator is for orientation only; what counts is the assessment from your tax office.