Can I reduce the tax burden through a severance payment?
March 15, 2022 | 40,00 EUR | answered by Albrecht Schlüter
Dear tax consultant,
My name is Leonie Hartmann and I have been working in a medium-sized company for 10 years. Due to a restructuring, I am now facing a severance payment. I am concerned about the amount of tax that will be imposed on this severance payment and whether there are ways to reduce it.
My monthly gross salary is 4,000 euros and the severance payment amounts to 50,000 euros. I have read that severance payments can be tax-advantaged, but I am unsure if this applies in my case. Are there specific regulations that could help me minimize the tax burden?
I have also heard that there are options to receive the severance payment in installments to spread out the tax burden. Is this a viable option for me and how exactly does it work from a tax perspective?
Furthermore, I am wondering if it is advisable to invest parts of the severance payment into company pension scheme to take advantage of tax benefits. What impact would this have on my tax burden and how much would the investment need to be to have a noticeable effect?
I look forward to your expert advice and thank you in advance for your support.
Sincerely,
Leonie Hartmann
Dear Mrs. Hartmann,
Thank you for your inquiry regarding your severance payment and the associated tax questions. As an experienced tax advisor in the field of severance payments, I am happy to assist you and provide you with some important information.
First of all, I would like to inform you that severance payments are generally subject to tax. However, there are certain regulations in place to minimize the tax burden. One important regulation is the so-called "Fünftelregelung" (one-fifth rule). This rule states that severance payments made due to the termination of an employment relationship only need to be taxed at one-fifth. This can significantly reduce the tax burden.
In your case, with a monthly gross salary of 4,000 euros and a severance payment of 50,000 euros, the "Fünftelregelung" could indeed help reduce your tax burden. The exact calculation of the tax burden depends on other factors, such as your tax rate and possible deductions.
Regarding the option of receiving the severance payment in installments, this is indeed a way to spread out the tax burden and reduce it overall. By receiving the payment in installments, the severance payment is not taxed all at once but spread out over a longer period of time. This could potentially keep you in a lower tax bracket and result in paying less taxes overall.
Making a contribution to a company pension scheme with the severance payment can also be a sensible measure to take advantage of tax benefits. By contributing to a company pension scheme, you can save on taxes as the contributions are tax-deductible. The amount of the contribution needed to have a noticeable effect depends on various factors and should be calculated individually.
Overall, there are indeed ways to minimize the tax burden on your severance payment. However, I strongly recommend seeking individual advice as tax regulations and opportunities can vary depending on your personal situation.
I am available to clarify any further questions and provide comprehensive advice. Please do not hesitate to contact me for a personal consultation.
Best regards,
Albrecht Schlüter
