What role does the amount of the severance pay play in taxation?
January 13, 2023 | 40,00 EUR | answered by Albrecht Schlüter
Dear tax advisor,
I am currently in negotiations with my employer regarding a possible severance payment. I am about to sign a termination agreement and would therefore like to inform myself in advance about the tax implications.
My current gross salary is 60,000 euros per year and I have been employed by my employer for 10 years. The severance payment being negotiated would be approximately 30,000 euros. I am unsure about how this amount will affect my tax burden and whether there are any tax planning options available to minimize it.
My biggest concern is that the severance payment could potentially push my taxable income into a higher tax bracket, thereby increasing my overall tax burden. Are there ways to structure the severance payment in a tax-efficient manner to reduce my tax liability?
Therefore, my question to you is: What role does the amount of the severance payment play in taxation and what tax implications can be expected? Are there ways to structure the severance payment in a tax-efficient manner to minimize my tax burden?
Thank you in advance for your support and advice.
Sincerely,
Simon Richter
Dear Mr. Richter,
Thank you for your question regarding the tax implications of a severance payment. I understand that you would like to be informed about the tax consequences before signing a possible termination agreement in order to better assess your financial situation.
In general, a severance payment is subject to income tax. The amount of the severance payment plays a crucial role, as it affects both your taxable income and the tax rate. In your case, with an annual gross salary of 60,000 euros and a severance payment of approximately 30,000 euros, this could indeed have an impact on your tax burden.
Severance payments are usually considered extraordinary income and are therefore subject to the "Fifth Rule". This means that while the severance payment is fully taxed, only one-fifth of the taxable amount is used to determine the individual tax rate. This can lead to a reduction in tax progression, as the tax rate is applied to the total sum (gross salary plus severance payment), but only a portion of the severance payment is taken into account.
There are various tax planning options to minimize the tax burden on a severance payment. One option would be to spread the severance payment over several years to optimize it for tax purposes. Making a one-time payment into a company pension scheme or a direct insurance policy can also reduce the tax burden.
However, it is important to note that tax planning should always be tailored to your individual situation. Therefore, I strongly recommend consulting a tax advisor or a specialist lawyer in labor law to find the best possible solution for your severance payment.
I hope that this information has been helpful to you. If you have any further questions, please feel free to contact me.
Sincerely,
Albrecht Schlüter
Tax Advisor
