How is severance pay calculated in Germany?

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.

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

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.

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

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.

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

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.

How does severance pay affect unemployment benefits?

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.

Can I transfer my severance into a company pension plan?

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.

In which year should I have the severance paid out?

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.

What happens with severance during the probation period?

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.

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

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.

From what company size does the Employment Protection Act apply?

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.

Severance Into Company Pension: Legally Save on Taxes | Severance Pay Calculator

The Company Pension as a Tax Booster

One of the most effective yet little-known methods of tax optimization for severance pay is the transfer into a company pension plan (betriebliche Altersvorsorge, or bAV). The basic idea: parts of the severance flow tax-free into a direct insurance policy, pension fund, or pension scheme. This reduces the taxable portion of the severance and thus the overall tax burden considerably.

The legal basis is Section 3 No. 63 of the Income Tax Act (EStG), which governs the tax-free transfer of employer contributions to certain forms of company pension. In 2026, up to 8% of the pension insurance contribution ceiling (8% of €96,600 = €7,728) can be paid tax-free into the bAV. For severance payments, this amount can even be multiplied under certain circumstances.

The Multiplication Rule for Severance

A particularly interesting aspect: the so-called multiplication rule under Section 3 No. 63 sentence 3 EStG allows for significantly higher tax-free contributions when employment is terminated. For each calendar year in which the employment existed and no bAV contributions were made, the tax-free amounts can be made up retroactively.

In practice, this means: an employee who had no bAV for 15 years can transfer a substantial portion of their severance tax-free into a direct insurance policy upon leaving. The exact amount depends on the unused allowances from previous years and should be calculated with a tax advisor.

Combining bAV and the Fifth-Part Rule

The special advantage: the bAV transfer and the fifth-part rule can be combined. The portion paid into the bAV is treated as tax-free, and the fifth-part rule applies to the remaining taxable portion of the severance. This way you benefit twice.

Example: With severance of €60,000, approximately €15,000 (depending on individual circumstances) could flow tax-free into the bAV. The remaining €45,000 would then be taxed under the fifth-part rule. The result: significantly less tax than with full taxation of the €60,000.

Which bAV Type Is Suitable?

For investing severance, five implementation paths are generally available: direct insurance (Direktversicherung), pension fund (Pensionskasse), pension scheme (Pensionsfonds), support fund (Unterstützungskasse), and direct commitment (Direktzusage). The tax-free contribution under Section 3 No. 63 EStG applies directly to direct insurance, pension fund, and pension scheme. Different tax rules apply to support funds and direct commitments.

In practice, direct insurance is the most commonly used route because it is easy to handle and can be continued even after leaving the company. When choosing, look for low costs, flexible payout options, and the ability to continue the contract privately.

Important Prerequisites and Pitfalls

The payment must be made in connection with the termination of employment and must be made by the employer — a self-transfer by the employee to the bAV provider is not sufficient. The employer must treat the payment as an employer contribution to the bAV.

Also important: bAV benefits are taxed in retirement (deferred taxation) and are generally subject to health and nursing care insurance contributions. The tax advantage at the time of payment is thus partially offset by taxes and social contributions at payout. Nevertheless, the bAV transfer is worthwhile in most cases, as the tax rate in retirement is typically lower than during working life.

Practical Tips for Implementation

Raise the topic of bAV early in severance negotiations — ideally before the termination agreement is signed. Have a tax advisor calculate the optimal amount. Check whether your employer already has a bAV contract for you that can be topped up. And don’t forget: even when you leave the company, you can continue a direct insurance policy as a private contract.

Calculation Example: bAV Transfer with €50,000 Severance

A concrete example illustrates the advantage. Suppose you receive €50,000 in severance and had no bAV for 12 years. With the multiplication rule, depending on unused allowances from previous years, you could transfer a significant portion tax-free. The fifth-part rule applies to the remaining taxable portion. Compared to full taxation of the €50,000, the tax savings can quickly reach €5,000 to €10,000.

Important: the calculation is individual and depends on many factors. Be sure to consult a tax advisor who can calculate the optimal split between bAV transfer and fifth-part rule.

Alternatives to bAV: Rürup Pension and More

Besides the bAV, there are other tax-advantaged retirement savings options. The Rürup pension (basic pension) allows tax-deductible contributions of up to €27,565 (single) or €55,130 (married) in 2026. Unlike the bAV, the Rürup pension can be taken out independently of the employer after leaving the company. However, the tax treatment differs from the bAV and must be evaluated on a case-by-case basis.

Conclusion: bAV and Severance — a Win-Win Situation

Transferring portions of severance into the bAV is one of the most elegant ways to optimize taxes. You save taxes and build retirement savings simultaneously. Combining it with the fifth-part rule maximizes the effect. Use our severance calculator for initial guidance and then seek professional advice.