Are there any tax-free allowances that I can use when declaring my severance payment?
July 28, 2022 | 40,00 EUR | answered by Edith Hartmann
Dear tax consultant,
my name is Sophia Fuchs and I have been working for 10 years in a company that unfortunately now needs to let me go due to restructuring. I have been offered a severance payment, and I am now thinking about how it will be taxed.
Currently, my monthly gross income is 3,500 euros and my severance payment amounts to 30,000 euros. I have heard that there are tax-free allowances that I can use when calculating the tax on my severance payment. Is this true, and if so, how high are these tax-free allowances? I am concerned that the taxation of my severance payment could take away a large part of it, so I am looking for ways to save on taxes.
What tax brackets apply to the taxation of severance payments, and are there ways to optimize them? For example, can I contribute parts of the severance payment to a company pension scheme to save on taxes? Or are there other tax planning options that I could use?
I look forward to your expert advice and thank you in advance for your support.
Kind regards,
Sophia Fuchs
Dear Mrs. Fuchs,
Thank you for your inquiry regarding the taxation of your severance payment. Indeed, there are exemptions that can be considered when taxing a severance payment. The most important exemption is the so-called fifth rule. This means that only a fifth of the severance payment is relevant for taxation. This will provide you with tax relief, as the tax burden will be lower due to the lower taxable amount.
In your case with a severance payment of 30,000 euros and a monthly gross income of 3,500 euros, the fifth rule could help you save taxes. However, for the calculation of the exact tax burden, all individual factors such as tax class, business expenses, special expenses, etc. should be taken into account.
When taxing severance payments, tax class VI generally applies. This tax class is usually associated with the highest tax rate. In order to optimize your tax burden, you could consider, for example, whether it is beneficial to contribute parts of the severance payment to company pension provision. This could help you save taxes, as contributions to company pension provision are tax-favored.
Furthermore, there are other tax planning options that should be tailored to your individual situation. An individual consultation with a tax advisor is advisable in order to achieve the best possible tax savings and consider all tax aspects.
I am happy to provide you with detailed advice and assist you in tax-optimized taxation of your severance payment. Please do not hesitate to ask any further questions, and I look forward to supporting you with your concerns.
Best regards,
Edith Hartmann, Tax Advisor
