Since 2025, a changed application of the fifth‑part rule under § 34 EStG has created a manager severance tax trap that especially affects managers receiving a severance. According to a recent news report, the net loss caused by this trap averages around €20,000 – a figure that depends on the individual income‑tax rate, the federal state and any additional levies, and should be understood only as a rough guideline.
Understanding the manager severance tax trap
This trap arises because a one‑off high severance payment in the year of receipt is fully subject to the progressive income‑tax schedule. If the same amount were spread over several years, the average tax rate would be lower. Concentrating the payment in a single year pushes the taxpayer into higher brackets, increasing the top rate, the solidarity surcharge and, where applicable, church tax. For managers who already earn in the higher tax bands, this can lead to a noticeable reduction in net income.
Why the trap is particularly risky for managers
In addition, many managers receive variable components such as bonuses, stock options or profit‑sharing alongside their base salary. These extra earnings can fall in the same year as the severance and further increase the total tax burden. Therefore it is essential to look at the whole income picture before estimating the tax consequences of a severance. This situation exemplifies the trap in practice.
Composition of the possible loss: gross severance, tax brackets and solidarity surcharge
The often‑cited net loss of about €20,000 stems from the difference between the tax due on a lump‑sum payment and the tax that would arise if the amount were fictitiously spread over several years. The relevant factors are:
- The size of the gross severance – the higher the amount, the stronger the progressive tax effect.
- Your personal tax rate – in the upper income brackets the rate can quickly exceed 40 % before the solidarity surcharge and possible church tax are added.
- The solidarity surcharge – it is levied on the income tax and adds to the overall burden.
- Possible church tax – depending on the federal state and religious affiliation this can further increase the tax load.
Legal basis: changes to the Income Tax Act since 2025
Since 1 January 2025 an adjusted application of § 34 EStG applies. The fifth‑part rule allows extraordinary income such as severance to be spread over five years, provided certain conditions are met. The legislative amendment has adapted the thresholds for using this rule, so that for high total incomes the possibility to smooth the severance tax‑wise disappears. Moreover, the tax‑rate brackets in the higher income range were slightly shifted upward. This change reinforces the progressive burden of a lump‑sum payment because the jump to the next tax bracket occurs earlier. The exact provisions are found in the 2024 Annual Tax Act and take effect immediately in the payroll tax calculation. Further details on the fifth‑part rule can be found in the official statutory text: § 34 EStG – Fifth‑part rule for extraordinary income.
Strategies for tax optimization in severance negotiations
One approach is to structure the severance contractually so that it is paid in several installments across different calendar years. This can mitigate the progressive tax rate. However, care must be taken that the installments are not classified as regular wages, otherwise the character of the severance is lost and the rule can no longer be applied. This method directly addresses the manager severance tax trap by spreading the payment.
Another option is to use social plans or voluntary programs where part of the severance is provided as a benefit in kind – for example training vouchers or occupational pension schemes. Such benefits can be tax‑privileged under certain conditions and reduce the amount that is immediately taxable.
Shifting the payout to the following year can also be useful if it places the payment in a year with otherwise lower income, thereby achieving a more favorable tax rate. In all considerations a tax adviser or a lawyer specializing in employment law should be involved to weigh the individual pros and cons and to avoid pitfalls.
Practical example: calculation of a typical manager severance
Assume a manager receives a gross severance of €80,000. Without applying the fifth‑part rule the whole sum would be taxed in the year of receipt at, say, an effective rate of 42 % (including solidarity surcharge), leading to a tax bill of roughly €33,600. If the amount were hypothetically distributed over five years (€16,000 per year) the average tax rate thanks to the progressive scale would drop to about 30 %, giving a total tax of around €24,000. The difference of approximately €9,600 illustrates how the tax burden can increase with a lump‑sum payment.
In practice the solidarity surcharge and possible church tax add to the disadvantage, so the effective net loss can be higher depending on the personal situation. This example is purely illustrative and does not replace an individual tax calculation.
Recommendations for employees and works councils
Employees should check early on whether the severance can be agreed in installments. It is advisable to schedule the payment for a year with as little other income as possible. Works councils can, during social‑plan negotiations, ensure that severance models are tax‑optimized and, if needed, bring in external tax advisers.
Furthermore, it is recommended to obtain an individual tax forecast before accepting a severance offer. Besides the immediate tax burden, possible effects on benefits such as unemployment insurance or pension entitlements should be considered. Early consultation with employment‑law specialists or tax advisers can help shape the negotiation result in a tax‑efficient way and avoid unnecessary losses.
Outlook: possible legislative adjustments and how to prepare
The current debate about a possible reform of the fifth‑part rule shows that legislators may review the burden on high severances again. Conceivably, higher allowances or a more flexible distribution could be introduced to cushion the progressive impact. Employees should stay informed about legislative developments and adapt their negotiation strategies accordingly.
Ultimately, the earlier the tax aspects of a severance are examined, the easier it is to avoid unpleasant surprises. Early advice from employment‑law lawyers or tax advisers can help optimize the negotiation result from a tax perspective and reduce avoidable losses.
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.