What Is the Fifth-Part Rule?
The fifth-part rule (Fünftelregelung) is a tax benefit under Section 34 of the German Income Tax Act (EStG) that applies to extraordinary income. This includes severance payments in particular, but also compensation for multi-year activities, anniversary bonuses, or indemnities. The purpose of the rule is to mitigate the progressive effect of the German tax system on one-time large payments.
Without the fifth-part rule, severance would be fully added to regular income and taxed at the correspondingly high marginal tax rate. With an annual income of €48,000 and severance of €40,000, for example, €88,000 would need to be taxed, which significantly pushes up the marginal tax rate.
How the Calculation Works Step by Step
The fifth-part rule follows a clear four-step process. In the first step, income tax on regular income is calculated — the annual income without the severance. In the second step, tax on regular income plus one-fifth of the severance is calculated. In the third step, the difference between step 2 and step 1 is determined — this is the additional tax caused by 1/5 of the severance. In the fourth step, this difference is multiplied by 5 to arrive at the total tax on the severance.
The result is generally significantly lower than the tax that would apply under normal taxation. The higher the severance relative to regular income, the greater the savings from the fifth-part rule.
Calculation Example with Concrete Numbers
Take a single employee in tax class I with annual income of €48,000 gross and severance of €40,000. Under normal taxation, they would owe about €25,500 income tax on total income of €88,000 — compared to about €9,500 on their regular income alone. The additional burden would be about €16,000.
With the fifth-part rule, the calculation looks different: Tax on €48,000 is about €9,500. Tax on €48,000 + €8,000 (1/5 of €40,000) is about €11,600. The difference is €2,100. Multiplied by 5, that gives €10,500 — about €5,500 less tax than under normal taxation.
Requirements for the Fifth-Part Rule
Not every severance payment automatically benefits from the fifth-part rule. Several conditions must be met. First, there must be a so-called concentration of income: the severance must be paid in a single assessment period (calendar year). With installment payments over multiple years, the benefit generally does not apply.
Second, the severance must serve as compensation for the loss of employment. Back pay, vacation compensation, or bonuses do not fall under the fifth-part rule. Third, an important change since 2025 must be noted: the employer no longer automatically applies the fifth-part rule in payroll tax deductions. Instead, employees must claim the benefit through their income tax return.
The Fifth-Part Rule Since 2025: What Changed?
Until the end of 2024, the employer could apply the fifth-part rule directly in the monthly payroll tax deduction. Since January 1, 2025, this is no longer possible. The severance is initially fully taxed, and the employee must claim the fifth-part rule through their income tax return.
This means: the net amount that arrives in your account is initially lower than under the old regulation. The tax refund only comes later through the tax assessment — this can take up to 18 months after filing the tax return. Factor this time lag into your financial planning.
Tips for Optimizing the Fifth-Part Rule
The fifth-part rule works best when other income in the payment year is as low as possible. Therefore, negotiate the payment date: if your employment ends on December 31, payment on January 2 of the following year can be significantly more favorable — provided you initially have no or only ALG I income in the new year.
Combine the fifth-part rule with a transfer to company pension (bAV). The portion paid into the bAV is tax- and social-security-free up to certain limits, and the fifth-part rule still applies to the remaining portion. Also utilize all available work-related expenses and special deductions to reduce your taxable income.
When the Fifth-Part Rule Does Not Apply
The fifth-part rule does not always apply. If the severance is paid in multiple installments over different years, the tax benefit generally does not apply because there is no concentration of income. Also, if the severance is paid together with a large final bonus or vacation compensation, the fifth-part rule can only be applied to the actual severance portion.
With a particularly high regular annual income, the savings from the fifth-part rule may be smaller because you are already in a high progressive tax bracket. In this case, a precise calculation with our severance calculator is particularly worthwhile to determine the actual savings.
The Fifth-Part Rule for Married Couples
For married employees, there are additional structuring options. Under the income splitting tariff (tax class III/V), the fifth-part rule is calculated based on the jointly taxable income. A strategic tax class change before the severance payment can further reduce the tax burden. Particularly if the non-severance-eligible partner has tax class V, a switch to IV/IV or even III for the severance-eligible partner can bring significant tax advantages.
Conclusion
The fifth-part rule is the most important tax instrument for severance payments. Since 2025, it can only be applied through the tax return, making planning more important than ever. Use our calculator to determine the savings for your specific situation, and factor the time lag for the tax refund into your financial planning.