Question 1

How is severance pay calculated in Germany?

Accepted Answer

The most common method is the standard formula (Faustformel): 0.5 gross monthly salaries per year of service. For a monthly salary of €4,000 and 10 years of employment, this results in €20,000 gross severance. The factor can range from 0.25 to 1.5 depending on age, length of service, and negotiating position.

Question 2

What is the fifth-part rule (Fünftelregelung) and how does it work?

Accepted Answer

The fifth-part rule (§ 34 EStG) is a tax benefit for extraordinary income like severance payments. Instead of taxing the full severance at the normal rate, only one-fifth is added to regular income, and the resulting additional tax is multiplied by five. This significantly reduces the tax burden because the progressive tax rate has less impact.

Question 3

Do I have to pay social security contributions on severance pay?

Accepted Answer

No. Genuine severance payments made as compensation for job loss are exempt from social security contributions. No deductions for health, pension, nursing care, or unemployment insurance apply. However, salary components disguised as severance may be subject to social security scrutiny.

Question 4

Do I have a legal right to severance pay in Germany?

Accepted Answer

There is generally no automatic legal right to severance pay in Germany. An exception is § 1a KSchG: in case of operational dismissal, the employer can offer severance if the employee waives their right to file an unfair dismissal claim. In practice, severance is often negotiated through termination agreements, social plans, or court settlements.

Question 5

How does severance pay affect unemployment benefits?

Accepted Answer

Severance pay is not deducted from unemployment benefits (ALG I) as long as the notice period was observed. However, a termination agreement can trigger a waiting period of up to 12 weeks for ALG I. The benefit duration may also be shortened if the employment ended before the regular notice period would have expired.

Question 6

Can I transfer my severance into a company pension plan?

Accepted Answer

Yes, this is one of the most effective tax optimization strategies. Parts of the severance can be transferred tax-free into a direct insurance policy or pension fund. The exact tax-free amounts are governed by § 3 No. 63 EStG and depend on contribution assessment ceilings.

Question 7

In which year should I have the severance paid out?

Accepted Answer

The choice of payment year can significantly affect the tax burden. The lower your other income in the payment year, the lower the tax on the severance. If your employment ends at year-end, payment in January of the following year can be advantageous if you initially receive only unemployment benefits.

Question 8

What happens with severance during the probation period?

Accepted Answer

During the probation period (maximum 6 months), employment protection under the KSchG generally does not apply. The notice period is only 2 weeks. There is no entitlement to severance — neither legally nor under the standard formula. In rare cases, small severance amounts are agreed upon in settlements.

Question 9

Does the fifth-part rule apply to severance in a termination agreement?

Accepted Answer

Yes, the fifth-part rule applies to all severance payments made as compensation for job loss — regardless of whether they result from dismissal, termination agreement, or court settlement. The prerequisite is that the severance is paid as a lump sum or within a single tax assessment period.

Question 10

From what company size does the Employment Protection Act apply?

Accepted Answer

The Employment Protection Act (KSchG) applies to businesses with more than 10 employees (full-time equivalents). Part-time workers are counted proportionally: up to 20 hours/week = 0.5, up to 30 hours/week = 0.75. In small businesses with fewer than 10 employees, only general dismissal protection applies — offering significantly less protection.

Guide: Severance Pay Calculator

Severance Pay in Germany 2026: How Much Am I Entitled To — and What's Left After Tax?

The Fifth-Part Rule Explained: How to Save Taxes on Your Severance Pay

Severance and Unemployment Benefits: What Many Don't Know

Negotiating Severance: How to Get a Better Deal

Severance Into Company Pension: Legally Save on Taxes

Dismissal Without Severance: When Employees Have No Claim