Severance pay (Abfindung) is fully subject to income tax in Germany, but benefits from special rules that reduce the tax burden.
Fifth rule (Fünftelregelung) § 34 EStG
The Fünftelregelung spreads the severance over five years for tax calculation purposes, softening the progressive tax effect. Important from 2025: The employer no longer automatically applies the rule – you must claim it yourself in your tax return.
Social security exemption
Genuine severance payments for termination of employment are completely exempt from social security contributions (no health, pension or unemployment insurance contributions).
Optimisation strategies
- Receive severance in a year with minimal other income
- Pay part into a company pension (bAV) tax-free
- Claim additional deductible expenses in that year
Sources: § 34 EStG, BMF guidance on Fünftelregelung.