From what amount do I have to pay tax on a severance payment?
September 11, 2023 | 50,00 EUR | answered by Fanni Siebert
Dear tax advisor,
my name is Ammelie Hentschel and I am currently working in a company that is offering severance payments due to restructuring and cost-saving measures. Now I am faced with the question of at what amount I have to pay taxes on this severance payment.
My current situation is as follows: I have been employed in this company for 10 years and have always performed my job to the satisfaction of the employer. However, due to the restructuring, my department is heavily affected and I am being offered a severance payment to leave the company.
My concerns are that I do not know exactly how much the severance payment will be and whether I have to pay taxes on it. I would like to know in advance at what amount I have to pay taxes on the severance payment and how this will affect me tax-wise.
Can you please explain to me exactly at what amount I have to pay taxes on the severance payment and what options there are to minimize any tax disadvantages?
Thank you in advance for your support and advice.
Sincerely,
Ammelie Hentschel
Dear Ms. Hentschel,
Thank you for your inquiry regarding the taxation of severance payments in your case. First of all, it is important to know that severance payments are generally subject to tax. This means that you must declare the received amounts as income and pay taxes on them. However, there are certain exemptions and regulations that can help you minimize tax disadvantages.
The amount of the severance payment significantly determines at what amount you will have to pay taxes. Severance payments are generally subject to a reduced tax rate, which is based on the duration of your employment with the company. For each full month of service, you will receive half a month's salary as a tax-free amount. However, this tax-free amount may not exceed 1.5 times your gross monthly salary.
If you have been employed by the company for 10 years, this means that you are entitled to a tax-free severance payment of up to 7.5 months' salary. If your severance payment exceeds this amount, you will have to pay taxes on the excess amount.
There are also other ways to minimize tax disadvantages. For example, you can spread the severance payment over several years to stay in a lower tax bracket. Investing in a company pension plan can also bring tax benefits. However, it is advisable to seek advice from a tax advisor or an expert in wage tax law to find the best solution for your individual situation.
I hope that this information has been helpful to you and I am available for further questions. Thank you for your trust and I wish you success in your decision.
Best regards,
Fanni Siebert
