Taxing a severance payment: the one-fifth rule eases the tax
You get a severance payment, but how much is left after tax? The good news: no social contributions are due on severance payments, and a special tax rule (the one-fifth rule) can significantly reduce the tax burden.
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What you should do now
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1. Classify the tax liability
The severance payment is taxable but free of social contributions; that increases the net amount.
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2. Check the one-fifth rule
If there is compensation for the loss of the job, reduced-rate taxation comes into consideration.
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3. In the tax return
Assert the one-fifth rule in the income tax return (Schedule N).
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4. Time the payout
The timing of the payout can play a role for tax purposes; get advice if applicable.
Frequently asked questions
Do I have to pay social contributions on my severance payment?
As a rule not. A severance payment for the loss of the job is free of social insurance; so no contributions to health, pension, long-term care and unemployment insurance are due. Wage tax, by contrast, does apply; but here the one-fifth rule can ease the burden.
What does the one-fifth rule achieve?
It eases the tax on the severance payment: the income tax is calculated as if the severance payment were spread over five years. This makes the jump into a higher tax rate (progression) smaller. You generally assert the one-fifth rule via your income tax return; it is worth keeping this in view.
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General information for self-help, not legal advice (RDG). In case of a high loss or uncertainty: contact a consumer advice center or a lawyer.