Deferring a severance payment to the following year: receipt, the fifth rule without a salary and the IAB in the payout year

Anyone leaving at the end of the year has a lever on their severance payment (Abfindung) that employees rarely have otherwise: the tax year. In December the payment meets twelve months of salary; in January it meets a year that may bring unemployment benefit, a break or a new job. The fifth rule (Fünftelregelung) of § 34 EStG reacts sharply to this other income; an investment deduction (Investitionsabzugsbetrag, IAB) under § 7g EStG works differently in the two years.

In order: what counts as receipt, what may be agreed, why the fifth rule only really bites in a year without salary, why it can still fail in the following year, what unemployment benefit costs and how an IAB calculates in both variants. The figures come from our own calculation for a sample case with a salary of 120,000 euros and a severance of 150,000 euros.

When is a severance payment received for tax purposes?

When it is credited to your account. Income belongs to the calendar year in which it accrues to the taxpayer (§ 11 (1) sentence 1 EStG). For employment income, § 11 (1) sentence 4 refers to § 38a (1) EStG; its sentence 3 assigns payments that are not regular wages, so-called other payments (sonstige Bezüge), to the calendar year in which they reach the employee. A severance payment is such an other payment.

Three things are therefore irrelevant: the date of the termination agreement, the end of the employment relationship and the agreed due date. If a severance due in December is only transferred on 5 January, it belongs to the new year. The ten-day rule, under which regularly recurring income around the turn of the year is assigned to the year it economically belongs to (§ 11 (1) sentence 2 EStG), does not apply to other payments; a severance payment does not recur.

Conversely, whatever the employer still instructs in December and whatever is credited on 30 December is December income, even if the agreement provided for a January receipt. Anyone who wants to control the timing therefore has to agree it and also tell payroll.

May the payout be deferred to the following year?

Yes, as long as the agreement is made before the original due date. In 2009 the Federal Fiscal Court (Bundesfinanzhof) ruled that employer and employee can shape the receipt of a severance payment with tax effect by moving its intended due date to a later point before it falls due (judgment of 11 November 2009, IX R 1/09). In the case decided, payment had been scheduled for November and was moved by mutual consent to January of the following year; the tax arose in the following year. The court regularly sees no abuse of legal arrangements under § 42 AO in such cases, because the parties could have chosen the due date freely from the outset.

The tax administration has adopted this. Under the Federal Ministry of Finance (BMF) letter on severance payments of 1 November 2013, it does no harm to the fifth rule if employer and employee stipulate that the severance, although due, is only to be paid in the following year (para. 8 sentence 6). In practice the clause sits in the termination agreement or the court settlement: payment "on 15 January" or "with the January payroll". A later change is possible, but only before the original date is reached; a severance that was already due and simply not yet transferred cannot be rescued into the next year by a supplementary agreement.

The price of deferral is a month without security. Between leaving and payment, the severance is an unsecured claim against the former employer. If the employer becomes insolvent in that period, insolvency benefit (Insolvenzgeld) covers only outstanding wages for the last three months of the employment relationship (§ 165 (1) sentence 1 SGB III), not the severance. With an employer in difficulty this risk outweighs the tax effect.

Why does the fifth rule work so much better in a year without salary?

Because it only smooths progression where there is still progression. The fifth rule computes the tax on the severance as five times the difference between the tax on the other income and the tax on the other income plus one fifth of the severance (§ 34 (1) sentence 2 EStG). If the other income already sits in the 42 percent top-rate zone, that difference is five times the same linear amount; the rule then yields nothing. If the other income is zero, one fifth of the severance is run through the whole tariff from the bottom, including the basic allowance and the progression zones; the result is multiplied by five (§ 34 (1) sentence 3 EStG).

The sample case shows both. With a salary of 120,000 euros and a severance of 150,000 euros in December, the entire severance sits in the 42 percent zone; the tax is 107,343 euros with and without the fifth rule. If the severance arrives in January with no other income and no unemployment benefit, it costs 20,781 euros, that is 13.9 percent. In between lies the case that is common in practice: January receipt with twelve months of unemployment benefit, more on that below.

The table also shows the limit of the rule: anyone who leaves in December and earns a similar salary from January onwards merely moves the severance from one 42 percent zone to the next. The lever is the income trough, not the calendar.

Is lower income in the following year alone enough for the fifth rule?

No. The fifth rule requires the compensation to be received as a lump sum (Zusammenballung), and the tax office tests this in two steps (BMF letter of 1 November 2013, paras. 8 to 11). First step: does everything arrive in one assessment period? Second step: does the compensation exceed the income that is lost up to the end of that assessment period? If so, the concentration is always present (para. 9). If not, the relief is only granted if the taxpayer has further income in the year of receipt that he would not have had without the termination, so that he receives more overall than in the normal course of events (paras. 10 and 11).

It is this second step that tips with a January receipt. In December of the leaving year no further income is lost up to the year end; every severance passes the test. In January of the following year the income lost up to the year end is a full year's salary. A severance above the annual salary still passes under para. 9. A severance below it must go into the comparison: income of the year of receipt including the severance and wage-replacement benefits against the income of the previous year. Unemployment benefit is counted (para. 11 sentence 11), and with pure employment income the comparison may be made on gross receipts rather than net income (para. 11 sentence 12).

Two conclusions. First: the smaller the severance relative to the salary, the sooner a January receipt fails the concentration test; a new job in the following year helps because its salary raises the receipts side, a year without income hurts. Second: never split. Partial amounts in two years are in principle harmful for both parts (para. 8 sentence 2). Only a minor secondary payment remains harmless, one that is no more than 10 percent of the main payment or lower than the tariff relief on the main payment (para. 8 sentences 4 and 5, following the BFH judgment of 13 October 2015, IX R 46/14). With 150,000 euros that is 15,000 euros; an advance in December above that costs the relief on the rest.

What does unemployment benefit do to the tax on the severance?

It is tax-free and still makes the severance considerably more expensive. Unemployment benefit (Arbeitslosengeld I) is subject to the progression proviso (Progressionsvorbehalt, § 32b (1) sentence 1 no. 1a EStG): it is not taxed, but it raises the tax rate on the other income. Where the progression proviso and the fifth rule coincide in the same year, an integrated calculation is prescribed in which the benefits are added in full to the remaining taxable income (BFH of 17 January 2008, VI R 44/07, and of 22 September 2009, IX R 93/07). The benefit is therefore not divided by five; it acts like income sitting beneath the severance and pushes the severance fifth into higher tariff zones.

In the sample case the benefit is around 2,772 euros a month, 33,264 euros a year. That is our own approximation: assessment pay capped at the contribution ceiling of 8,450 euros a month (§ 341 (4) SGB III, social-insurance reference values ordinance 2026), less a 20 percent social-insurance lump sum, wage tax and solidarity surcharge (§ 153 (1) SGB III), of which 60 percent (§ 149 SGB III). The decision of the Federal Employment Agency is what counts. These 33,264 euros turn 20,781 euros of tax on the severance into 48,668 euros; the progression proviso costs 27,887 euros, more than half of the fifth-rule advantage. The January receipt still comes out cheaper at 89,546 euros against 107,343 euros.

Two things go with this. First, the filing obligation: anyone who has received more than 410 euros of wage-replacement benefits must file an income tax return (§ 46 (2) no. 1 EStG), and the fifth rule is only available there anyway. Second, the employment-law side, which a specialist lawyer should clarify: benefit is suspended on account of a severance only if the employment ended without observing the ordinary notice period (§ 158 (1) SGB III), for at most one year and at most until 60 percent of the severance would have been earned as salary (subsection 2). A twelve-week blocking period (Sperrzeit) looms if the employee ends the employment relationship himself without good cause (§ 159 (1) sentence 2 no. 1, (3) sentence 1 SGB III); a termination agreement is such an ending. Both change the tax calculation, because less benefit means less progression proviso; a blocking period is nevertheless not a tax-saving model.

How does an investment deduction work in the payout year?

Differently in the two years; that is the part the usual guides leave out. An IAB under § 7g EStG deducts up to 50 percent of the planned acquisition costs of a direct investment from the profit of the business, up to three years before the acquisition. The resulting loss from business is offset against employment income of the same year, including a severance. What has to be in place is explained in the requirements of the IAB and the IAB explained simply; here the only question is in which year it moves more.

In the December year the IAB meets salary and severance. A deduction of 100,000 euros lowers the other income from 118,770 to 18,770 euros. That has two effects at once: the deduction itself saves tax at the top rate; at the same time it brings back the fifth rule, which had yielded nothing at 118,770 euros of other income. Together that is 59,326 euros less tax, 59.3 percent per euro deducted, well above the 39.6 percent the same IAB achieves against the salary alone. In the January year the IAB meets only the severance. The remaining income turns negative, § 34 (1) sentence 3 EStG computes the tax as five times the tax on one fifth of the total income; the unemployment benefit now counts only with the part left after offsetting against the negative remainder (BFH VI R 44/07, second headnote). The first euros of deduction therefore work disproportionately, but from around 80,000 euros of deduction the 2027 tax is zero; every further euro of IAB is worthless in that year.

A dosing rule follows: in the January year only as much IAB as the severance carries; the rest of the deduction potential goes into the following years through special depreciation. How that works and when a loss carry-back into the salary year applies is shown in loss offsetting with the IAB. The better total in the sample case is nevertheless January with an IAB: 40,878 euros of tax over both years, which is just the tax on the 2026 salary. And the IAB remains what it is: a deferral, not an exemption. If the investment has not been made by the end of the third following year, the tax office reverses the deduction retroactively (reversal of the IAB); the deadlines are set out in the IAB time windows.

What happens to wage tax when the severance arrives in January?

The employer withholds wage tax as on any other payment, without the fifth rule. Since the 2025 assessment period it no longer applies the relief in payroll; the former sentences 9 and 10 of § 39b (3) EStG were removed by the Growth Opportunities Act (Wachstumschancengesetz). The wage tax on an other payment is the difference between the annual wage tax on the expected annual wage with and without the payment (§ 39b (3) EStG). In December that annual wage is the full salary plus the severance. In January after leaving, it follows the employee's own statement; if none is made, the employer extrapolates the wages paid so far to a full year (R 39b.6 (3) LStR).

That has a practical consequence: tell payroll in writing that you expect no further wages in the new year. Then the annual wage is just the severance; in the sample case the withholding of 54,171 euros is a good 12,000 euros lower than with an extrapolation of the December salary (66,465 euros). The fifth rule only arrives with the tax assessment in any case; in the January case the tax office then refunds 5,503 euros, with the extrapolation it would be 17,797 euros. Until then the money is tied up; with an assessment in the following year that can take eighteen months.

One more point for the year after next: after the assessment containing the severance, the tax office often sets advance payments as if such income would recur. An informal application under § 37 (3) sentence 3 EStG stating that the severance was a one-off reduces them.

What else depends on the year of receipt?

Parental allowance (Elterngeld), in two directions. For the amount of Elterngeld the severance does not count, because other payments are excluded from the assessment income (§ 2c (1) sentence 2 BEEG). For the entitlement as such it very much counts: the income limit of 175,000 euros tests the taxable income of the calendar year before the birth (§ 1 (8) BEEG); the severance is part of that income, and the fifth rule changes nothing about it. Anyone expecting a child therefore chooses the year of receipt with the due date in mind; the details are in Elterngeld and direct investment.

In social insurance, a severance for the loss of a job is not contributory pay for compulsorily insured employees (§ 14 SGB IV; Federal Social Court, judgment of 21 February 1990, 12 RK 20/88); the year of receipt plays no role there. Voluntarily insured members clarify the contribution consequences with their health insurer, where separate rules apply.

What speaks against deferring?

Five points that belong in every decision:

• Default risk. Until payment, the severance is an unsecured claim; insolvency benefit does not cover it. With an employer in trouble, December is the safe choice.
• Lump-sum concentration. If the severance is below one year's salary and a year with little income follows, the comparison can fail; then there is no fifth rule at all in the following year.
• A new job. Anyone earning about as much from January as before merely moves the tax year, not the tax rate. The lever is the income trough.
• Elterngeld. If the year of receipt is the calendar year before a birth, the severance can push taxable income above 175,000 euros.
• Liquidity. Wage tax is withheld in full in January; the fifth rule and any refund only arrive with the assessment, often in the year after next.

What do you clarify before signing the termination agreement?

• Is the ordinary notice period being observed? Is a blocking period looming? These questions determine the unemployment benefit and with it the progression proviso.
• Is the January due date stated expressly in the agreement? Has payroll been instructed not to transfer in December already?
• Does the severance exceed the annual salary? If not: what income is expected in the following year? Does the comparison with the previous year hold?
• Are there secondary payments in another year (bonus, profit share, early-leaver premium)? Do they stay below 10 percent of the main payment?
• What other income will arise in the following year: new job, self-employment, unemployment benefit, parental leave?
• Is a direct investment with an IAB planned? In which year is the deduction worth more? How much deduction can the January year carry at all?
• Is a birth foreseeable in the following year? Which calendar year is then the limit year for Elterngeld?

How we approach the payout date in the initial call

Those who come to us with a severance payment have often already signed the termination agreement; then the year of receipt is fixed and the question is whether and how much IAB that year can carry. If the agreement is not yet in place, we go through the two years side by side, with your figures instead of the sample case. The tax structuring itself and the contract clause belong to your tax adviser and to employment law; which project fits which year and which documents the tax office wants to see for the deduction is what we clarify in a non-binding initial call. We give no return promises in doing so.