When is severance pay taxed according to the one-fifth rule?

In the event of early termination of employment, the employees concerned are generally given a severance payment. Unfortunately, such payments have not benefited from a tax allowance since 2006, but they are still eligible for the one-fifth rule (in accordance with § 34 EStG).

To benefit from the reduced taxation under the one-fifth rule, the severance payment must be paid in a lump sum in one year, and the annual income with the severance payment must be higher than the income if the employment had continued uninterrupted. The tax concession is intended to mitigate the progressive effect of the income tax rate.

Currently, the Federal Fiscal Court has ruled that if the gross salary in the previous year was around 140,000 Euro, a severance payment of "only" 43,000 Euro cannot be taxed at a reduced rate. Therefore, the one-fifth rule does not apply. This is because when comparing the income from the previous year with the income in the year of the severance payment, there is no higher income, no progressive effect, and therefore no tax disadvantage that needs to be offset (BFH ruling of 8.4.2014, IX R 33/13).

As part of the comparative calculation, two figures must be compared: the "actual figure", i.e. what you received in the relevant year including the severance payment, and the "target figure", namely the income you would have received if the employment had continued uninterrupted. You can use the previous year's income as a basis. If the severance payment does not exceed the income lost by the end of the year, you can include other income that you would not otherwise have received, such as unemployment benefit.