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 former tax-free allowances for severance were abolished in 2006. Social-security contributions, by contrast, are generally not due on a genuine severance paid for the loss of your job. The real burden comes from progression: because the severance lands on top of your other income in the payout year, a large share of it is taxed at the top rates of 42 % or 45 % — often regardless of what you earn in a normal year.

Two statutory levers counter this bunching effect: the one-fifth rule (Fünftelregelung) of § 34 EStG, which smooths the progression arithmetically, and — on a much larger scale — the investment deduction (Investitionsabzugsbetrag, IAB) under § 7g EStG, which directly lowers taxable income in the severance year. The calculator above puts both effects side by side.

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

The one-fifth rule is a tariff relief for extraordinary income such as severance payments: the tax is computed as if the severance were received evenly over five years — so only one fifth of the amount hits the progression, and the resulting additional tax is then multiplied by five. In three steps:

1. The tax office computes the income tax on your remaining taxable income — without the severance.
2. Then the tax on the remaining income plus one fifth of the severance.
3. The difference between the two is multiplied by five and added to the tax from step 1.

An example (tax year 2025, individual assessment, income tax only): with €40,000 of remaining income and a €100,000 severance, the tax without the one-fifth rule is €47,888. With the one-fifth rule it is €42,795 — a saving of roughly €5,100.

When does the one-fifth rule save a lot — and when almost nothing?

The one-fifth rule works best when your remaining income in the payout year is low — and fades to almost nothing when that income already sits in the top tax bracket. In that case even one fifth of the severance is taxed at 42 % or 45 %, and multiplying by five restores the full burden. Exactly in this constellation — high ongoing income plus a large severance — the second lever comes into play: an IAB lowers the remaining income and thereby also strengthens the one-fifth rule itself.

How does an investment deduction (§ 7g EStG) reduce the 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 asset is even acquired. Formed in the severance year, the IAB reduces your remaining income exactly when your marginal rate is highest, and additionally improves the starting point of the one-fifth rule. The full requirements are covered in Investitionsabzugsbetrag: all §7g EStG requirements — and who can use it, and how it works in practice, using battery storage as the example, in IAB under §7g EStG: example calculation for battery storage.

The prerequisite is a business generating trade income — an access that employees can create structurally, too: either through an own business that acquires and operates, say, a photovoltaic system or a battery storage facility, or through a stake in a commercially active partnership, typically as a limited partner of a GmbH & Co. KG holding a specific energy project. How strongly the tax refund reduces the equity actually tied up is shown in How much equity is actually required?.

The example shows the typical order of magnitude: with high remaining income, the one-fifth rule alone saves only a few thousand euros — combining it with an IAB shifts the result by an order of magnitude. Whether and how the two instruments can be combined in your specific case belongs in the hands of your tax advisor: the IAB requires a serious, documented investment plan and must lead to an actual investment within three years, otherwise it is reversed retroactively with interest — the consequences are described in Reversing the IAB: what happens if you don't invest — deadlines, interest, ways out.

What other levers exist for a severance payment?

• Time the payout: if the severance is paid in January of the following year — after leaving, with no ongoing salary added — it meets a lower remaining income and the one-fifth rule works considerably harder.
• Protect the bunching requirement: the one-fifth rule generally requires the severance to be received within one calendar year. Instalments spread over several years can forfeit the relief entirely.
• Use pension contributions: contributions to a Rürup base pension are deductible as special expenses and lower the remaining income in the severance year.
• Account for the progression proviso: unemployment benefits in the same year raise the tax rate on your remaining income — that erodes the one-fifth effect and belongs in any serious plan.

A broader overview of legal structuring options — and their limits — is given in Legally reducing your tax: the most effective strategies.

How does this severance calculator work?

The calculator implements the income-tax tariff of § 32a EStG exactly per the statutory formula for the tax years 2025 and 2026 (basic allowance €12,096 and €12,348 respectively), with income splitting for joint assessment. The one-fifth rule follows § 34 (1) EStG including the special case of a negative remaining income; the solidarity surcharge is computed with its exemption threshold and phase-in zone (§§ 3, 4 SolzG), church tax as 8 % or 9 % of the income tax. An activated IAB reduces the remaining taxable income. As “net from severance” the calculator shows the severance minus the tax that arises in the respective scenario on top of taxing the remaining income alone.

Deliberate simplifications: the calculator ignores income-related expenses, special expenses and pension contributions, the progression proviso (e.g. unemployment benefits) and the special-expense effect of church tax, and it does not check the requirements of § 7g EStG. It is meant for orientation — only your tax office's assessment is authoritative.