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#severance pay #tax calculator #fifth-part rule #income tax #payroll tax 4 min

Severance Pay Calculator: How to Tax Your Severance Correctly

Discover how your severance pay affects your tax burden and how to calculate progressive taxation and the fifth-part rule with a severance pay calculator.

Deutsche Version verfügbar — auf Deutsch lesen.

Inhaltsverzeichnis
  1. Severance pay and the progressive tax system – What you need to know
  2. Fifth‑part rule under § 34 EStG – Calculation and filing requirement from 2025
  3. Concrete example – Severance with a higher tax rate
  4. Tool‑practice: Using the OHANA severance calculator step by step
  5. Edge cases where the rule provides no benefit
  6. Additional optimisation: Soli, church tax and investment allowance
  7. Your next step

Severance pay and the progressive tax system – What you need to know

A severance payment is a one‑off cash amount that is usually paid when an employment contract ends. In Germany it is treated as ordinary income and therefore subject to the progressive income‑tax scale. For example, a taxpayer with a taxable income is already in a higher marginal tax bracket (plus a solidarity surcharge on the income tax). Adding a severance amount would immediately push the extra amount into a higher marginal rate, so the effective burden could be considerably higher than the nominal rate. The solidarity surcharge is calculated on the assessed income tax, while church tax applies only for members of a church‑tax‑collecting religious community – a detail that the available online calculators, including the OHANA tool, do not display automatically.

Fifth‑part rule under § 34 EStG – Calculation and filing requirement from 2025

The fifth‑part rule is a tax instrument that can be applied to extraordinary one‑time payments such as severance payouts to soften the impact of the progressive tax curve. The calculation proceeds in three steps:

  1. Increase the taxable income by one‑fifth of the severance amount.
  2. Compute the income tax (including SolZ) for this fictitious annual income.
  3. Multiply the difference to the tax without the adjustment by five – the result is the tax attributable to the severance.

Important: Until 31 December 2024 many employers typically applied the rule automatically. Since 1 January 2025 the taxpayer must actively request the fifth‑part rule in the income‑tax return. This means you have to verify the benefit yourself and indicate the use of the rule in your tax assessment.

Concrete example – Severance with a higher tax rate

Assume your regular taxable income is in a higher marginal rate bracket. Without the fifth‑part rule the entire severance amount would be taxed at a higher rate, potentially leading to an increased total burden. Applying the fifth‑part rule raises the income by one fifth. The tax for the fictitious income rises, and multiplied by five this yields the tax on the severance. The overall tax liability can thus drop, delivering a potential saving. This illustration shows that even at higher marginal rates the rule can produce a noticeable benefit.

Tool‑practice: Using the OHANA severance calculator step by step

  1. Open the OHANA severance calculator (version 2024‑2026) and enter your regular taxable income.
  2. Input the expected severance amount.
  3. Tick the checkbox “apply fifth‑part rule”.
  4. Optionally add an investment‑allowance deduction under § 7g EStG if you have planned investments.
  5. The result screen shows two side‑by‑side tables: tax liability without and with the fifth‑part rule, including the solidarity surcharge. The absolute tax saving is displayed in euros.
  6. Note the disclaimer that the calculation is for orientation only and does not constitute a binding payroll‑tax prediction. Discuss the outcome with a tax adviser before filing.

Edge cases where the rule provides no benefit

The fifth‑part rule only yields a tax advantage when the progressive tax curve would otherwise push you into a higher marginal rate. If your regular income already sits in the highest bracket (including SolZ), splitting the severance over five years hardly changes the rate because each fifth is still taxed at a high level. Likewise, a very low taxable income means the rule has little effect – the tax stays in the basic rate and the fictitious split does not alter the outcome. Another situation is when substantial tax‑reducing measures are already in place (e.g., large advertising expenses, special deductions, or an investment‑allowance deduction). In such cases the additional smoothing effect of the fifth‑part rule may be marginal. Running multiple scenarios in the calculator helps you decide whether the rule is worthwhile for your specific numbers.

Additional optimisation: Soli, church tax and investment allowance

The solidarity surcharge is already added to the income‑tax result in the OHANA calculator. For taxpayers subject to church tax, an extra amount for church tax must be added. Because the calculator does not automatically include this component, you should add the amount manually to capture the full tax burden.

Beyond the fifth‑part rule, you can use other legal levers: the investment‑allowance deduction (§ 7g EStG), the basic personal allowance, child allowance, or strategically timing deductible expenses. Combining these measures with the fifth‑part rule often pushes the net tax on a severance payout well below the result without any optimisation.

Your next step

  1. Run your personal figures through the OHANA severance calculator to quantify the potential saving.
  2. Record the outcome and assess whether the displayed benefit meets your expectations.
  3. Schedule a consultation with your tax adviser to review the numbers and correctly request the fifth‑part rule in your tax return.

By following this practical workflow you gain control over the tax impact of your severance payment.

Try it yourself: Severance Tax Calculator (Fifth Rule)

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