How are pension back payments taxed?

If you receive a pension back payment over a period longer than twelve months, this counts as remuneration for work over several years and is considered extraordinary income. This income can be taxed more favourably using the so-called fifth rule.

The favourable income is deducted from the taxable income, and then one fifth of it is added back. The income tax for the taxable income is then calculated, once with and once without the fifth amount. The difference is multiplied by five. This gives the tax for the extraordinary income.

The tax office automatically checks which calculation is more favourable for you. For the correct calculation, you must enter your back payment separately. Enter any work-related expenses incurred in connection with the back payment (court or legal fees) separately as well.

Note: The Münster Tax Court ruled on 19.09.2019 (Ref. 5 K 371/19 E) that the reduced tax rate under § 34 EStG does not apply to a pension back payment relating to two assessment periods if the back payment is made in the second assessment period.