The fifth part rule 2026, as updated in the latest BMF guide, brings important changes to the taxation of severance payments. Anyone who receives a dismissal this year or is negotiating a severance should know the new administrative guidelines precisely, as they directly affect how much of the agreed gross amount ends up net in the account. RechtStark summarizes the updates and shows what employees need to watch for. A basic overview of the fifth part rule can be found in our article Fifth part rule for severance: Save taxes explained simply.
Background: Why the updated fifth part rule for 2026 is being adjusted
The fifth part rule under § 34 EStG is a tax privilege for extraordinary income such as severance payments. It prevents a one‑off high payment from pushing the tax rate into the top bracket by fictitiously spreading the amount over five years and then multiplying the resulting additional tax by five. Since tax brackets, basic allowances and social security ceilings shift annually, the Federal Ministry of Finance (BMF) regularly updates its application guidelines – the so‑called guides or BMF letters. For 2026, the main drivers are the inflation‑related rise in nominal wages (cold progression) and the technical switch to the ELStAM procedure (electronic wage tax deduction characteristics), which automatically provides data to the tax office.
Unlike a statutory change, the guides are administrative directives: they bind the tax offices but do not create a new legal entitlement for taxpayers. Nevertheless, they determine the practice according to which your tax assessment is calculated. Ignoring the updates risks that the employer incorrectly applies wage‑tax withholding or that the tax office does not carry out the beneficial‑tax check optimally.
Key Changes in the Fifth Part Rule 2026
The BMF guidelines valid for 2026 mainly clarify three areas that are directly relevant to employees:
- Bundling of income: If you receive, in addition to the severance, regular salary, Christmas bonus or a bonus in the termination year, the tax office checks whether the “bundling” intensifies the progression effect. The new guidelines specify how one‑off payments (e.g. bonuses for previous years) are to be timed – crucial for the size of the privileged portion.
- Application vs. ex officio route: Previously, the fifth part rule often had to be applied for explicitly in the tax return (schedule N). Thanks to ELStAM, tax offices can increasingly retrieve the data automatically. The 2026 guidelines clarify more clearly when the beneficial‑tax check is carried out ex officio and when you should still file an application to meet deadlines.
- Multi‑year installments: If the severance is paid in installments across the year‑end (e.g. part payment in December, the rest in January), the “bundling” used to apply mainly in the first year. The new hints differentiate more strongly according to the economic attribution of the payments – a point employers can use when shaping termination agreements.
Understanding the fifth part rule 2026 helps you anticipate how these changes affect your net severance.
Impact on Net Severance: Calculation Examples
To illustrate the effect of the fifth part rule 2026, we look at two typical scenarios. All values are rounded and exemplary; the actual tax burden depends on your other income, tax class, child allowances and federal state.
Example 1: Single, Tax Class I, No Children
Assume you receive a severance of 80,000 euros. Your regular taxable income (excluding the severance) is 45,000 euros.
- Without the fifth part rule: Taxable income rises to 125,000 euros. The top tax rate (42 % from approx. 66,761 euros of taxable income 2026) applies to a large portion. Income tax amounts to roughly 36,500 euros.
- With the fifth part rule: One‑fifth of the severance (16,000 euros) is added to the taxable income = 61,000 euros. Tax on that: about 12,800 euros. Tax on the taxable income without severance (45,000 euros): about 8,500 euros. Difference = 4,300 euros. Multiplied by five = 21,500 euros. Plus base tax (8,500 euros) = roughly 30,000 euros income tax.
- Saving: Around 6,500 euros less tax thanks to the fifth part rule.
Example 2: Married, Joint Assessment, One Child, Main Earner
Severance 120,000 euros, joint taxable income without severance 70,000 euros (splitting tariff).
- Without the fifth part rule: Taxable income 190,000 euros. Tax approx. 52,000 euros.
- With the fifth part rule: One‑fifth = 24,000 euros. Taxable income + one‑fifth = 94,000 euros. Tax on that approx. 18,500 euros. Tax on 70,000 euros approx. 11,500 euros. Difference 7,000 euros × 5 = 35,000 euros + 11,500 euros = roughly 46,500 euros.
- Saving: Around 5,500 euros.
These examples show: The absolute tax advantage grows with the size of the severance and the progression level. The fifth part rule for 2026 does not change the formula, but the updated tax brackets and allowances shift the result slightly in your favor each year (or to your disadvantage in case of cold progression if the table is not adjusted).
Deadlines and Forms: What Employees Need to Know
Tax claims are made via Schedule N of the income tax return (lines for “severance payments” and “fifth part rule”). Important deadlines and form aspects:
- Filing the tax return: The basic deadline is 31 July of the following year (2027 for the tax year 2026). With a tax adviser the deadline is usually extended to the end of February 2028. Missing the deadline means the beneficial‑tax check is lost.
- Wage tax certificate: The employer enters the gross severance in line 10 (or line 18 for multi‑year payments) and marks it with the capital letter “S” (for “other remuneration”). Check the certificate for correctness in February/March 2027.
- Application for the beneficial‑tax check: Enter the severance amount in Schedule N and tick the box “Application for application of the fifth part rule”. Even if the tax office often reviews it ex officio, the application secures your right if data are missing.
- Adjust advance payments: If you expect a large severance, you can request a reduction of the quarterly advance payments from the tax office (§ 37 EStG) to avoid liquidity shortages until the tax assessment arrives.
Tip: Keep the termination agreement, the dismissal letter and all correspondence regarding the payment date. In case of dispute over the timing of payment (e.g. transfer on 30.12., credit on 02.01.), these documents decide.
Typical Pitfalls and How to Avoid Them
In practice, the same mistakes keep showing up that reduce or completely nullify the tax advantage:
- Several severance payments in one year: If you receive, for example, a severance from your old employer and another from a new employer (after a brief interim job), the tax office adds both together. The fifth part rule is applied only once to the total. If possible, negotiate a shift to the next calendar year.
- Installments across the year‑end: As mentioned above, a payment in January 2027 for a position terminated in 2026 may be treated as income for 2027. This can be advantageous (lower other income in 2027) or disadvantageous (loss of the fifth part rule if 2027 shows no “bundling”). Clarify the payment date contractually.
- Waiving salary in favor of the severance: If you waive parts of your current salary and increase the severance accordingly, the tax office checks whether this is an avoidance maneuver. Regular salary is taxed in full, severance is privileged. An artificial split can jeopardize the fifth part rule.
- Social security vs. tax: The fifth part rule applies only to income tax. In the statutory health, long‑term care, pension and unemployment insurance the severance is contribution‑free (up to the contribution assessment ceiling), but the employer must state it correctly in the wage tax certificate. Do not confuse the two systems.
- Church tax upon leaving the church: If you leave the church during the termination year, church tax on the severance applies only if the resignation becomes effective before the payment date. The resignation usually takes effect at the end of the month after notification – plan accordingly.
Checklist: Securing the Maximum Tax Advantage
Use this checklist as a practical companion when negotiating and settling your severance:
- 1. Set the payment date: Agree in the termination agreement on a clear due date (ideally in a year with low other income). Avoid unintended installments across the year‑end.
- 2. Run a gross‑to‑net simulation: Ask a tax adviser or an employment lawyer for a projection for 2026 and 2027. The difference can amount to several thousand euros.
- 3. Check the wage tax certificate: Request the certificate promptly and compare the amount and the marker “S” with your contract.
- 4. File the tax return on time: Use Schedule N, apply the fifth part rule explicitly and attach the termination agreement (a copy is sufficient).
- 5. Monitor the beneficial‑tax check: Review the tax assessment: Was the fifth part rule applied? Does the notice state “beneficial‑tax check carried out”? If there is a discrepancy, file an objection (deadline: one month).
- 6. Manage advance payments: If you expect a large severance, request a reduction of the quarterly advance payments to avoid interest disadvantages.
- 7. Consider litigation funding: If the employer refuses to pay a severance or offers too little, a dismissal protection lawsuit can be enforced. RechtStark, as a litigation funder, assesses the chances of success and, if the evaluation is positive, covers the costs of the proceedings – you bear no financial risk. Further tips on negotiation can be found in our article Why many severance offers are too low and what good lawyers do differently.
Conclusion: Making the Most of the Updated Rule for 2026
The updated BMF guidelines for 2026 are more than a mere formality – they determine how your tax office technically applies the fifth part rule and which pitfalls lurk with income bundling, multi‑year inflows and the application process. Those who know the changes, choose the payment date wisely, file a complete and timely tax return and check the tax assessment secure the statutory tax advantage in full. In complex situations (high amounts, several employers, cross‑border issues) consider getting advice from an employment lawyer and a tax adviser. RechtStark assists you as a litigation funder to financially secure the legal enforcement of your severance – so that in the end not only the gross but also the net amount is correct.
Note: This article is for general information purposes only and does not replace individual legal advice. For a free initial assessment of whether litigation funding may be an option for your case, you can contact RechtStark.