Can I receive my severance pay in installments?
September 12, 2022 | 40,00 EUR | answered by Lorenzo Zimmermann
Dear tax advisor,
my name is Dirk Busse and I have been working in a medium-sized company for the past 10 years. Due to a restructuring, my employer is planning to terminate my employment in the near future and offer me a severance package. Since I could really use this financial support, I have been wondering if it is possible to receive the severance in installments rather than all at once.
My concern is that a one-time payment could lead to tax disadvantages, as it could affect unemployment benefits and other social benefits. Additionally, receiving the severance in installments would provide me with more financial planning security and allow me to manage the money over a longer period of time.
Therefore, I am wondering if there are legal ways to receive the severance in installments and if this would be advantageous from a tax and social security perspective. Are there specific requirements or conditions that need to be met to arrange for installment payments? What would such an agreement look like and what are the pros and cons associated with it?
I hope you can help me with this question and provide me with possible solutions. Thank you in advance for your assistance.
Sincerely,
Dirk Busse
Dear Mr. Busse,
Thank you for your inquiry regarding the possibility of receiving a severance payment in installments. A severance payment in installments is generally possible, however, certain conditions and requirements must be met.
First and foremost, it is important to mention that the payout of a severance payment is generally subject to taxation. It does not matter whether the severance is paid in a lump sum or in installments, the tax is due in both cases. However, installment payments can be tax advantageous, as the taxable income is spread out over several years and may potentially fall into a lower tax bracket.
In terms of social security, receiving the severance payment in installments could also be advantageous. A one-time large severance payment could result in you not receiving social benefits for a certain period of time, as your assets exceed the exemption limit. Through installment payments, you may be able to avoid this issue and continue to receive social benefits.
To arrange for installment payments of the severance, you must discuss this with your employer. A written agreement should be made, detailing the amount of the installments, the timeframe of the payout, and other conditions. It is advisable to seek legal advice to ensure that all tax and social security aspects are taken into account.
The pros and cons of installment payments should be evaluated on an individual basis. As mentioned earlier, installment payments can be tax and social security advantageous. However, you must consider that you will have to wait for the money over a longer period of time and may incur interest losses.
I hope that this information has been helpful to you. If you have any further questions, please feel free to contact me.
Best regards,
Lorenzo Zimmermann
