Is there a cap on tax-free severance payments?
April 28, 2022 | 40,00 EUR | answered by Albrecht Schlüter
Dear tax consulting team,
My name is Paula Hagedorn and I have been working in a medium-sized company for 10 years. Due to a redundancy, I am entitled to a severance payment, about which I would like to learn more.
Currently, my monthly gross salary is 3,500 euros, which corresponds to an annual salary of 42,000 euros. The severance payment offered to me amounts to 20,000 euros. Now I am concerned whether I have to pay taxes on this severance payment and if there is a limit for tax-exempt severance payments.
I have already researched some information on the internet, but the regulations are very complex and difficult for me as a layperson to understand. Therefore, I would be very grateful if you could help me.
Could you please explain to me whether the 20,000 euro severance payment is tax-free or if I have to pay tax on part of it? Is there a specific limit for tax-exempt severance payments that I need to consider?
Thank you in advance for your help!
Sincerely,
Paula Hagedorn
Dear Mrs. Hagedorn,
Thank you for your inquiry regarding your severance package after a termination due to operational reasons. I understand that you are concerned about whether you will have to pay taxes on the severance and how high these taxes could potentially be. I would be happy to explain the tax aspects that need to be considered when receiving a severance.
Generally, severance pay is subject to income tax, as it is considered other income in the context of income tax assessment. The amount of tax depends on various factors, such as the amount of the severance, your individual tax rate, and any tax-free allowances.
The good news is that severance payments up to €15,000 are tax-free. In your case, the severance of €20,000 exceeds this tax-free threshold. This means that you will need to pay taxes on the amount of €5,000 that exceeds the threshold. This amount will be added to your regular income and taxed according to the tax rate.
There is, however, a way to minimize the tax burden. You can receive the severance in a tax-optimized manner, for example by taking advantage of a five-year rule. With this rule, the severance is divided over five years and only one-fifth of it is taxed each year. This can significantly reduce the tax burden.
It is important to note that each severance package should be considered individually, and it is advisable to seek advice from a tax advisor. I am also available to personally assist you in analyzing your individual situation in more detail and help you with the tax-optimized payout of your severance.
I hope that this information has been helpful to you. If you have any further questions, please feel free to contact me.
Best regards,
Albrecht Schlüter
