Is a severance payment taken into account when calculating the progression proviso?
February 21, 2023 | 50,00 EUR | answered by Edith Hartmann
Dear tax consultant,
I hope you can help me with my question regarding severance pay and progression clause. I am currently facing a situation where my employer has offered me a severance package. I would like to accept this severance package as I want to leave the company, but I have concerns about the tax implications.
My current annual gross income is 60,000 euros and the severance pay amounts to 20,000 euros. I am wondering if the severance pay will be taken into account when calculating the progression clause. I want to avoid the severance pay pushing my tax rate up and ending up with less net income than expected.
Could you please explain how the severance pay is factored into the calculation of the progression clause and if there are ways to minimize its impact? Are there any tax planning opportunities to reduce the impact of the severance pay on my tax burden?
I would greatly appreciate your help with this matter. It is important for me to fully understand the tax consequences of a severance package in order to make an informed decision.
Thank you in advance for your assistance.
Sincerely,
Jan Werner
Dear Mr. Werner,
Thank you for your inquiry regarding severance pay and progression clause. I am happy to explain to you how severance pay affects the calculation of the progression clause and what options are available to minimize the tax implications.
The progression clause states that income that is tax-free but can increase the tax rate is taken into account when calculating taxable income. This includes, among other things, severance pay paid as part of the termination of an employment relationship. The severance pay is added to the taxable income and can therefore increase the tax rate.
In your case, with an annual gross income of 60,000 euros and a severance pay of 20,000 euros, your taxable income would increase to a total of 80,000 euros. This could result in you having to pay a higher tax rate than with your regular income alone.
To minimize the tax implications of the severance pay, there are various tax planning options available. One option could be to spread the severance pay over several years to lower the tax rate. Utilizing tax allowances and benefits can also help reduce the tax burden.
However, it is important to note that tax planning must always be done within the framework of legal requirements to avoid any tax consequences. Therefore, I strongly recommend that you seek advice from a tax advisor or specialist to find the best possible solution for your individual situation.
I hope this information has been helpful to you. If you have any further questions or would like a more detailed consultation, I am happy to assist.
Best regards,
Edith Hartmann, Tax Advisor
