Discrimination: Employer's compensation completely tax-free

Under the General Equal Treatment Act (AGG), discrimination on grounds of race or ethnic origin, gender, religion or belief, disability, age, or sexual identity is prohibited (§ 1 AGG). If the prohibition of discrimination is violated, the employer is obliged to compensate for the resulting damage. The person affected can claim an appropriate monetary compensation (§ 15 para. 2 AGG). The question is how such compensation is treated for tax purposes. Recently, the Rhineland-Palatinate Fiscal Court ruled that compensation paid by an employer to an employee due to discrimination, bullying, or sexual harassment is tax-free and not taxable wages. This applies even if the employer denied the alleged discrimination and only agreed to the payment in a court settlement. Tax-free means that the payment is not subject to social security contributions (Rhineland-Palatinate Fiscal Court, 21.3.2017, 5 K 1594/14).

The case: An employee filed a unfair dismissal claim against the termination of her employment for "personal reasons", also seeking compensation for discrimination due to her disability. A few weeks before the dismissal, the Office for Social Affairs had determined a physical disability of 30%.

Before the Labour Court in Kaiserslautern, the employee and her employer reached a settlement in which "compensation according to § 15 AGG" of 10.000 Euro was agreed, and the employment relationship was terminated by mutual consent. The tax office wanted to treat the compensation as taxable wages.

According to the tax judges, the settlement reached at the Labour Court indicates that the payment was not compensation for material damages under § 15 para. 1 AGG (e.g. lost wages) but for non-material damages under § 15 para. 2 AGG due to discrimination against the claimant as a disabled person. Such compensation payments are tax-free and not to be classified as wages. The claimant's employer had denied the discrimination.

However, as part of the settlement, he was willing to pay compensation for (only) alleged discrimination. Such income does not have the character of wages and is therefore tax-free.

The compensation is not only tax and social security-free, but it is also not included in the progression clause, so it does not lead to a higher tax rate for other income.

The Federal Administrative Court has just awarded young civil servants compensation for age-discriminatory pay because their pay violated the prohibition of age discrimination. The court derived the entitlement to compensation from § 15 para. 2 AGG (Federal Administrative Court rulings of 6.4.2017, 2 C 11.16 and 2 C 12.16). The pay regulations disadvantaged younger civil servants solely because of their age (ECJ ruling of 19.6.2014, C-501/12).

Discrimination: Employer's compensation completely tax-free

Are there no more employment tax cards?

No. Since 2010, no new income tax cards have been sent out, as the government decided to switch to an electronic income tax procedure. This is intended to simplify communication between citizens and the tax office.

Since 2013, all the data that employers need for the monthly income tax deduction, which was previously on the cardboard income tax card, has been made available in a tax administration database for employers to access. This data is referred to as Electronic Income Tax Deduction Features (ELStAM):

• Income tax class,
• Factor for tax class IV,
• Marital status,
• Religion,
• Spouse's religion,
• Number of child allowances,
• Allowance for disabled persons / bereaved,
• Income tax allowance (for high work-related expenses, special expenses and extraordinary burdens),
• Exemption and addition amounts for low earners.

Are there no more employment tax cards?

What is the electronic employment tax statement and how do I obtain it?

An employment tax statement is provided to you by your employer at the end of the year. It is usually given to you along with the first payslip in January or February.

If you have not received the employment tax statement, request it from your employer. You do not need to include this statement with your tax return, as the data has already been electronically transferred to the tax authorities, as noted at the top of your employment tax statement.

If your employer processes payroll for their employees electronically, they must issue an electronic employment tax statement. However, they must send the data directly to the tax authorities. The employment tax statement contains your electronic wage tax deduction details, which were relevant for the monthly wage tax deduction.

What is the electronic employment tax statement and how do I obtain it?

How do I enter income tax statements from one or more employers?

If you have multiple employers, for example with a part-time job, you will also have received multiple statements. In this case, click on “Enter details of another payslip”. You can then enter the name of another employer in the newly appearing input form. This way, different jobs remain clearly organised in your tax return.

You can also remove a job from your tax return completely by clicking on the bin icon to the right of the employer's name.

If the employer taxes the mini job at a flat rate, you do not need to enter the income in the tax return. In this case, however, you cannot claim any work-related expenses or the employee allowance for your part-time job.

If it is a mini job for which you have given your employer permission for income tax deduction or released your electronic income tax deduction features (ELStAM), you must also enter the data in the income tax return.

How do I enter income tax statements from one or more employers?

What is a pension?

Pension payments play a special role in income tax. Many people receive payments in retirement that do not come from the statutory pension insurance – for example, a civil service pension or a company pension. But what exactly are pension payments, how are they taxed, and what is meant by the so-called pension allowance? In this article, we explain the most important points clearly and concisely.

What are pension payments?

Pension payments are regular payments you receive after the end of an active employment relationship – a kind of "replacement" for wages. They are usually paid by the former employer or a pension scheme and are considered income from employment for tax purposes.

Typical examples of pension payments:

• Civil service pensions
• Company pensions
• Transitional payments for early retirement
• Widow's or widower's pensions from the former employer

Important: Pension payments are not to be confused with the statutory pension. The statutory old-age pension falls under "other income" and is declared under pension income. Pension payments, on the other hand, are considered employment income.

How are pension payments taxed?

Pension payments are generally subject to income tax. However, not the entire amount is taxed – there are tax benefits in the form of allowances.

Pension allowance

The state grants a certain percentage of pension payments tax-free – this is the pension allowance. Its amount depends on the year you first received pension payments.

For anyone receiving pension payments for the first time in 2025, the following applies:

• 13,6 percent of the annual pension payments are tax-free,
• but a maximum of 1.020 Euro.

Surcharge to the pension allowance

In addition to the percentage allowance, a fixed surcharge is granted. For first-time receipt in 2025, this amounts to 306 Euro per year.

The allowance remains fixed as long as the payments continue. However, it is only granted once, for the first pension payment received.

Multiple pension payments – what to consider?

If you receive multiple pension payments, such as a civil service pension and an additional company pension, you must declare all payments in full in your tax return. It is important to note:

• The pension allowance and surcharge are only granted once, for the first pension payment received.
• Further pension payments are fully taxable, unless they are payments with their own entitlement, such as from another employment relationship.

Tip: Check your electronic payslip to see how many pension payments are listed. Employers or pension schemes report the amounts with a special code for the tax office.

Special features for survivors' pensions

Survivors, such as widows or widowers, can also receive pension payments – for example, in the form of a survivor's pension from the deceased's former employer.

The same tax rules generally apply to these pension payments, including the pension allowance and surcharge. However, the allowance may be reduced proportionally, for example, if the original recipient had already used up this allowance.

Important: If you receive a statutory survivor's pension (e.g. from the German Pension Insurance), this is not a pension payment. In this case, you must declare the pension in Annex R.

Example: How taxation works

Ms Meier retires in January 2025 and receives a civil service pension of 30.000 Euro per year. Since she receives pension payments for the first time in 2025, the following allowances apply:

• Pension allowance: 13,6 percent of 30.000 Euro = 4.080 Euro
• Surcharge: 306 Euro
• Total allowance: 4.080 Euro + 306 Euro = 4.386 Euro

The taxable part of the payments is: 30.000 Euro – 4.386 Euro = 25.614 Euro

Ms Meier must declare this amount in the tax return (Annex N). The tax office automatically takes the allowance into account, provided the payslip is correctly completed.

Conclusion

Pension payments are tax-advantaged – but only partially. The pension allowance and surcharge make part of the payments tax-free, the rest is subject to regular taxation. Anyone receiving multiple pension payments or a survivor's pension should carefully check how much is actually taxable. By providing complete and correct information in the tax return, you avoid queries and benefit from the possible allowances.

What is a pension?

What are remunerations for multi-year work?

A payment or advance payment for multi-year employment (e.g. severance payments) can be taxed at a reduced rate in the year of payment using the five-year method. The key factor is that the employment spans two calendar years.

The so-called five-year rule benefits extraordinary income under German tax law (§ 34 EStG). These so-called "income subject to preferential tax rates" are income earned over several years but realised and taxed in a single year.

What are remunerations for multi-year work?

Are my pension payments taxable?

Yes, your pension payments are generally taxable. According to the Income Tax Act, they are considered income from employment and are subject to the wage tax deduction procedure. This means that income tax is automatically deducted at the time of payment.

What is included in pension payments?

Pension payments include, in particular:

• Pension (e.g. civil service pension)
• Widow's or widower's pension
• Orphan's pension
• Maintenance contributions
• Similar benefits

How does taxation work?

The taxation of pension payments is generally the same as for a regular employment relationship. Since 2013, the paying office (e.g. pension office) retrieves your electronic wage tax deduction features (ELStAM) from the tax authorities using your tax identification number and date of birth.

However, there is an important difference: a pension allowance is granted for pension payments. This reduces the taxable income.

What is the pension allowance?

The pension allowance is an annually determined tax-free portion of your pension payments. In addition, a fixed supplement to the pension allowance is granted. The amount of these allowances depends on the year in which you first receive pension payments.

With the introduction of the Pension Income Act (AltEinkG) on 01.01.2005, a gradual transition to so-called subsequent taxation began. This means that instead of contributions to pension schemes, the later benefits – i.e. pension payments and pensions – are increasingly taxed.

The transition period lasts until 2040. After that, civil service pensions and pensions will be treated completely equally for tax purposes – the pension allowance will then be completely abolished.

How are the allowances developing?

The pension allowance and the supplement decrease every year for new pension recipients. So those who retire later receive a lower allowance. From 2040 onwards, no pension allowance will be granted.

The decisive factor is the year of first receipt of pension payments. This determines:

• the applicable percentage,
• the maximum amount of the pension allowance, and
• the supplement to the pension allowance.

These values are regulated in the table to § 19 para. 2 Income Tax Act (EStG).

Is the allowance permanent?

Yes. The pension allowance and the supplement, once determined, apply for life – regardless of whether the amount of your pension payments changes due to regular adjustments.

When is the allowance recalculated?

The allowance is only recalculated if your pension payments change due to offsetting, suspension, reduction or increase (e.g. due to legal regulations).

In the calendar year in which the pension payment changes, the highest allowances possible under § 19 EStG apply.

What is the standard allowance for income-related expenses?

For pension payments – as with pensions – a standard allowance for income-related expenses of 102 Euro per year applies, which is automatically taken into account. Only if you can prove higher work-related expenses is it worth providing individual proof.

Are my pension payments taxable?

Severance payment and one-fifth rule: When does the reduced tax rate apply?

In the event of early termination of employment, employees often receive a severance payment. Since 2006, this is no longer subject to a tax allowance, but it can still be taxed at a reduced rate under the so-called fifth rule (§ 34 EStG) – under certain conditions.

Conditions for applying the fifth rule

For the reduced taxation to apply, the following conditions must be met:

• The severance payment is paid in a lump sum in one calendar year.
• The annual income with severance payment must be higher than the income that would have been earned if the employment had continued uninterrupted.

The aim of this regulation is to mitigate the progressive effect of the income tax rate when exceptionally high income is received in one year due to the severance payment.

No tax advantage for low severance payment

The fifth rule does not apply automatically. This is shown by a ruling of the Federal Fiscal Court on 08.04.2014 (Az. IX R 33/13):

Comparison calculation: “Actual amount” vs. “Target amount”

Whether the fifth rule is applicable is checked by means of a comparison calculation:

• Actual amount: Actual income in the year of the severance payment (including severance payment)
• Target amount: Fictional income if employment had continued until the end of the year (e.g. based on the previous year's income)

Note:

If the severance payment does not exceed the lost income until the end of the year, further income may be taken into account that would not have been received without the termination of employment – e.g. unemployment benefit.

Example:

Mr M. ended his employment in June 2025 and received a severance payment of 35.000 Euro. His regular annual income would have been 70.000 Euro.

In the severance year, he only earns 25.000 Euro in wages plus the severance payment. The total income is 60.000 Euro – and thus below the income if he had continued working without interruption.

The fifth rule cannot be applied as there is no progressive disadvantage.

Severance payment and one-fifth rule: When does the reduced tax rate apply?

Voluntary resignation: Is the severance payment subject to the one-fifth rule?

Ending an employment relationship is often accompanied by a severance payment, especially if the employer terminates the contract. This severance payment may be tax-advantaged through the so-called one-fifth rule. But what applies if you resign yourself or if a termination agreement is initiated by you?

What is the one-fifth rule?

The one-fifth rule (§ 34 EStG) is a tax benefit for extraordinary income, which includes severance payments (§ 24 No. 1a EStG). It ensures that this income is taxed at a reduced rate to avoid excessive tax burdens due to the lump sum payment.

Conditions for the tax benefit

For the one-fifth rule to be applied, the severance payment must be related to an extraordinary event – typically termination by the employer or an amicable solution under pressure or conflict.

No tax benefit for voluntary resignation

Important: If you resign without external pressure or without prompting from the employer, the tax benefit will not be granted.

This applies in particular if you resign of your own accord without any conflict or financial hardship.

Exception: Termination agreement in a conflict situation

However, the Münster Finance Court has ruled that a tax benefit is also possible if the employee initiates the termination agreement themselves but acts under pressure:

• In the case decided, the employee was in conflict with the employer over their reclassification.
• They proposed the termination agreement themselves but acted to avoid further disputes.
• The court saw this as a sufficient conflict situation to justify the application of the one-fifth rule.
  (FG Münster, 17.03.2017, Az. 1 K 3037/14 E, confirmed by BFH, judgment of 13.03.2018, IX R 16/17, BStBl 2018 II p. 709)

BFH confirms: No actual pressure required for amicable solution

The Federal Finance Court (BFH) clarified: If the employer and employee amicably terminate the employment relationship and a severance payment is made, it is not absolutely necessary for the employee to have been under recognisable pressure. The amicable solution itself is sufficient for the tax benefit.

When does the tax benefit lapse despite severance pay?

The BFH ruled in another judgment (06.12.2021, IX R 10/21):

• If a severance payment is not paid in one year but spread over several years, the one-fifth rule lapses.
• This also applies if there are partial payments (e.g. severance pay and starting bonus) made for the same event.

Special case: Sprint bonus

A so-called sprint bonus, paid when an employee voluntarily leaves early, can be considered compensation and subject to the one-fifth rule.
(Hessian FG, court order of 31.05.2021, Az. 10 K 1597/20)

Conclusion

Even on your own initiative, a severance payment can be tax-advantaged – the decisive factor is the actual conflict situation or an amicable solution between the parties. However, it is important that the payment is made in one year and recognised as compensation.

Voluntary resignation: Is the severance payment subject to the one-fifth rule?