(2023) How is interest on pension arrears treated?

Pensions are often approved at a later date and then paid retroactively in a lump sum, for example, due to legal disputes or after clarification of the facts. The insurance provider must pay additional interest on a pension back payment - in the case of pensions from the statutory pension insurance, this is 4% p.a. (§ 44 Abs. 1 SGB I).

These back payment interest amounts are taxable as "income from capital assets" (BFH ruling of 9.6.2015, VIII R 18/12; also BMF letter of 4.7.2016, IV C 3-S 2255/15/10001).

Previously, the tax authorities treated the back payment interest as "other income" and taxed it, like the pensions and pension back payments of the basic provision (statutory pension, Rürup pension, pension from an occupational pension scheme), with the taxable portion as "other income". The taxable portion is determined by the year the annuity begins, e.g. in 2015 with 70%.

The new BFH ruling means that the interest on the pension back payment is now fully taxable as capital income, but remains tax-free within the savings allowance of 1.000 Euro or 2.000 Euro. Since the pension insurance provider does not withhold withholding tax, you must declare the interest in the "Anlage KAP" as part of your tax return.

Unlike before, you may no longer enter the interest in the "Anlage R". The pension back payment itself is tax-privileged according to the one-fifth rule (in accordance with § 34 EStG).