German Severance Tax Calculator 2026 (Abfindung, one-fifth rule)

For tax purposes a severance is compensation under section 24 no. 1a EStG and therefore fully taxable. The old tax-free allowance was abolished in 2006. The good news on the other side of the ledger: no social security contributions are due, because a genuine severance is not pay for work performed but compensation for losing the job. That keeps roughly 20 percent of contributions off the amount, unlike unused vacation, overtime or bonuses paid out at the same time, which remain fully contributory.

The problem with a one-off payment is progression. The German income tax tariff rises with income, so a severance stacked on top of a normal annual salary is taxed at the upper end of your tariff. Section 34 EStG counteracts exactly that. The tax on the severance is calculated as if only one fifth of it had been received, and the result is then multiplied by five. Because the tariff is considerably flatter in its lower half, the total comes out below the tax on the full amount.

The rule requires a concentration of income (section 34 (2) no. 2 EStG). Two conditions: the severance has to be received within a single calendar year, and that year, including the severance, has to exceed what you would have earned had the job continued. If the payment is split across two years, the relief is normally lost. Small partial payments of up to ten percent of the main amount are harmless under the case law. This calculator does not test the condition, it assumes it is met.

The most important procedural point, and the most expensive one to miss: since 1 January 2025 employers may no longer apply the one-fifth rule when withholding wage tax. The Wachstumschancengesetz removed that provision to relieve employers of the assessment and the liability that came with it. In the month of payment your severance is therefore taxed in full like any other one-off payment. You get the relief afterwards, through your income tax return, declared as compensation subject to reduced taxation. If you do not file, you forfeit the entire benefit.

How much the rule is worth depends on the rest of your income. The effect is largest when your regular income is low and the severance would otherwise push you far up the progression. It disappears entirely once your regular income already sits in the top-rate range, which in 2026 starts at roughly EUR 69,879 of taxable income: the tariff is linear there, so five times one fifth equals exactly the whole amount.

Hence the usual planning moves, all of which have to happen before the termination agreement is signed: schedule the payment into a year with little other income, typically the year after you leave; pull deductible expenses such as basic pension contributions into that same year; and respect the notice period in the agreement, because otherwise your unemployment benefit is suspended under section 158 SGB III and the severance is partly offset against it. The severance itself does not trigger a benefit ban, but the termination agreement can.