Employment Law2026-10-13

Making the Most of Your Severance Payment: What You Can Still Shape in the Payment Year

The one-fifth rule is only half the lever. The termination date, the year of receipt and the spending you incur in the severance year decide what you actually keep – and all of that is settled in the termination agreement.

On the table sits a termination agreement with a severance payment that looks like a great deal of money. How much of it you actually keep is not written on that piece of paper. Several large redundancy programmes are currently running in and around Munich by way of termination agreements, among them the voluntary programme at BMW. What is on offer there, and what matters before you sign, I have set out in my article Job cuts at BMW: should you accept the severance offer or not?. Anyone who signs up to one of these programmes decides two things with the same stroke of the pen: the amount of the severance payment and the year in which it is taxed. The second is regularly overlooked – and it is the part you can still shape while you are negotiating. How the taxation works in principle I have explained in a separate article: Taxing a severance payment – the one-fifth rule. Here I want to look at the levers that sit within the agreement itself.

In brief

A severance payment is fully taxable and lands in a single calendar year. The one-fifth rule under § 34 Abs. 1 EStG softens the progression, but it does not remove it. Two further factors matter alongside it: the termination date, because it determines how much salary still accrues in the severance year, and the point at which the payment is received, because that fixes the tax year. Both are set out in the termination agreement and both are open to negotiation before you sign. If you invest the severance payment in the same year in a let, existing property and have it renovated, you can deduct the renovation costs immediately as maintenance expenditure. That lowers the tax base at a point where it bites twice over. The limit for this is set out in § 6 Abs. 1 Nr. 1a EStG. Once you have signed, all that is left is to tot up the numbers.

How I can help you

Reviewing the termination agreement before you sign, including the termination date and when the severance payment falls due
Negotiating with your employer over the amount, the year of receipt, garden leave, holiday and bonuses
Assessing whether the conditions for the one-fifth rule are actually met in your case
Wording that does not needlessly risk a benefit-suspension period (Sperrzeit) or a deferral of your unemployment benefit
Coordinating with a firm of tax advisers before the agreement is signed

Why a severance payment pushes up your tax rate

There is no longer any tax-free allowance for severance payments. The entire amount counts as income from employment. Because it lands in a single year, it pushes your taxable income upwards in one jump. And with it, the rate of tax rises on everything else you have earned that year.

Social security contributions, on the other hand, are not charged on a genuine severance payment, because it is not pay for work done but compensation for the loss of your job. That is the one item you cannot do anything about – precisely because it does not arise in the first place.

The one-fifth rule – and what changed in 2025

The one-fifth rule treats the payment as though it had been received in equal parts over five years: one fifth is added to your remaining income, the additional tax on that is worked out, and the result is multiplied by five. Because the income-tax scale is progressive, you end up paying less than if the whole sum were taxed at once.

Two points matter here.

The first catch concerns your payslip. Since 2025 the employer no longer applies the one-fifth rule when deducting wage tax. The payment initially appears fully taxed, and you only see the benefit once your income-tax return is assessed. So do not count on the figure that first lands in your account – and plan for the gap until your tax assessment comes through.

The second catch is the requirement that the income be concentrated (Zusammenballung). In the year you leave, you must receive more in total than you would have done had your employment continued unchanged. With a very early departure and a comparatively small payment, the relief can therefore fall away entirely – at exactly the point where it would help the most.

The employment-law lever: termination date and year of receipt

This is where employment law meets tax law, and it does so at a point that is still open during the negotiation.

The termination date determines how much salary still accrues in the severance year. That remaining income is the base on top of which the one fifth is added. A departure in June produces a different tax bill from one in December – for an identical severance payment.

The point at which the payment is received is the second adjustment. Under the receipt principle in § 11 Abs. 1 EStG, what counts is when the payment is received. Whether it falls due in December or in January shifts it into a different tax year – with a quite different base beneath it. Someone who ends their employment at the end of the year and takes the payment in the following year lands in a year in which hardly any income has accrued so far.

Both are set out in the termination agreement. Both can be moved before you sign. Afterwards, they cannot.

The second lever: investing the severance payment in property

If your remaining income forms the base, then anything that lowers that base works at two points in the severance year: it lowers the remaining income – and at the same time the base on top of which the one fifth is added. There the scale is flatter, and that difference is then multiplied by five.

That is exactly where the idea I want to set out here comes in. The payment is not invested after it has been taxed; instead, in the severance year itself, it goes into a let, existing property which is renovated in that same year. The sequence has three steps:

The purchase happens in the severance year: a flat or house that is already let, as a rule using part of the severance payment as equity and financing on top of that.
The renovation happens in the same year. The repair work is commissioned and – this is the crucial point – also paid for while the severance year is still running.
The deduction is immediate: under the relevant conditions, these costs are maintenance expenditure and therefore, in the year they are paid, fully deductible as income-related expenses against income from letting – not spread over decades, but immediately.

The upshot: the renovation lowers your taxable income in precisely the year in which it is most expensive. Rather than taxing the payment and then investing it, the two coincide.

The decisive catch sits in the third step, and it hangs directly on the first. Because you have only just bought, § 6 Abs. 1 Nr. 1a EStG comes into play: if repair and modernisation costs exceed 15 per cent of the acquisition cost of the building within three years of acquisition, they are treated as acquisition-related production costs. And in full – this is an all-or-nothing threshold (Freigrenze), not an allowance. Exceed it by a single euro and you lose the immediate deduction not just for that euro but for the entire amount; it is then written down over the useful life, and the effect you were after is gone.

From this follows a simple formula, and because it is an all-or-nothing threshold it forgives nothing: the scale of the renovation must fit the purchase price. Anyone wanting to deduct €50,000 immediately needs a building whose acquisition cost is well above €333,000 – and must also be sure that the works really are maintenance rather than production expenditure. This is not a rule of thumb for the kitchen table; a tax firm works it out before the purchase contract is signed.

For my part, only one thing is decisive here: which year is even available at all is determined by the termination agreement. Purchase, handover and payment all have to fall within that year – and how long it is set out in the very paper you are being asked to sign. That is why the tax question belongs before you sign, not after.

A worked example

The order of magnitude can be shown with a model case. A severance payment of €150,000, an annual salary of €110,000, departure at the end of June – so €55,000 of salary accrues in the severance year, taken here, in simplified terms, as the remaining taxable income. Add to that the purchase of a let, existing property in the same year and €50,000 of renovation that is immediately deductible as maintenance expenditure.

Without the spending: remaining income €55,000, total tax of around €73,400.
With the spending: remaining income €5,000, total tax of around €28,400.

The difference is around €45,000. Without the one-fifth rule the same deduction would bring only around €21,000 – the rest arises because the base on top of which the one fifth is added falls from €55,000 to €5,000. This is a model calculation based on the 2026 income-tax scale, single assessment, without the solidarity surcharge or church tax. Your case will look different. The figures show the mechanism, not your result.

Where the arrangement comes unstuck

The model case is the favourable case. It has conditions, and any one of them can tip it over.

The calendar year must be the same. For expenditure the outflow principle in § 11 Abs. 2 EStG applies: a payment received in December and a builder’s invoice in January take effect in two different years – and the effect is gone.
The month of departure has to fit. On a full year’s salary the spending often meets only the normal marginal rate. The later the departure, the smaller the lever.
The 15 per cent threshold. On a purchase it is not a side issue but the main issue – and it is an all-or-nothing threshold: if it is exceeded within three years of acquisition, then under § 6 Abs. 1 Nr. 1a EStG the entire expenditure counts as production costs and can only be written down. Not the excess, but all of it. The scale of the renovation and the purchase price therefore have to fit together.
The purchase has to go through. Completion at the notary, transfer of possession and payment of the builders all in the same year – with financing, that is no foregone conclusion. A purchase contract in November can founder at the bank, and then the renovation falls into the following year.
Maintenance expenditure is not everything that an invoice shows. Anything that raises the standard of the building or extends it is production expenditure – regardless of the 15 per cent limit. That distinction decides the immediate deduction.
An owners’ association has a say. With freehold flats, the association decides on works to the common parts. The timing and extent are then not yours alone to determine – and nor, therefore, is the tax year.
The order of the questions. A property that only adds up because of the tax effect is not a good property. Location, tenants, rent and financing have to stand on their own – the payment comes once, the property stays for twenty years. The tax effect is the bonus, not the reason.

How I work: the process

You send me the offer or the draft termination agreement, with your start date, salary and the proposed termination date.
I check what is still open as a matter of employment law: the amount, the termination date, when it falls due, garden leave, holiday, bonuses, your reference, the risk of a benefit-suspension period.
Where numbers are involved, I bring in the tax calculation to go with them – from a tax firm, not from the gut.
We settle which points are to be negotiated and in what order.
I negotiate with your employer and put before you the text that is ready to sign.

Common mistakes

Signing first and going to the tax adviser afterwards – at which point the arrangement is over
Reckoning with the figure that lands in your account after wage tax has been deducted, rather than the result after assessment
Treating the termination date as a formality, even though it determines the tax year and the base
Assuming the one-fifth rule applies automatically, without checking the concentration-of-income requirement
Buying a property solely because of the tax effect
Deciding on the renovation in the severance year but only paying for it the following year
Buying and renovating without first working out the 15 per cent limit against the purchase price

Frequently asked questions

Can I have the severance payment paid out in the following year?

That is a matter for negotiation and is possible under many termination agreements. For tax purposes, under the receipt principle in § 11 Abs. 1 EStG, what counts is the year in which the money is received. If the payment lands in a year with little other income, the tax is generally lower. Whether your employer will go along with it depends on the programme – there is no harm in asking, and the question belongs in the negotiation, not after it.

Does the one-fifth rule apply automatically?

No. It requires extraordinary income and a concentration of that income: in the year you leave, you must receive more in total than you would have done had your employment continued. Since 2025 it is also no longer taken into account when wage tax is deducted, but only when your income tax is assessed. So you have to file the return, otherwise the benefit never materialises.

Should I put my severance payment into a property?

That is first an investment decision and only then a tax question. A property has to stand on its own: location, tenants, rent, financing. If it does, the severance year can be the right time to buy and renovate, because the immediate deduction is worth the most there. It does not work the other way round – the tax effect does not justify a purchase you would not make without it. Whether the renovation costs really are immediately deductible in your case turns on the 15 per cent all-or-nothing threshold in § 6 Abs. 1 Nr. 1a EStG – exceeding it means all of it, not just the excess – and on the distinction between maintenance and production expenditure. That belongs before the purchase contract and in the hands of a tax firm.

My employer has set a deadline – do I have to sort all of this out beforehand?

The deadline in a voluntary programme is usually set shorter than it needs to be. How much time you actually have, and what an extension costs, I have described in my article A voluntary redundancy programme: accept or decline?. For the tax question you do not need weeks, but you do need to have looked at it before you sign.

Won’t my employer advise me on this?

Your employer owes you no tax advice and, as a rule, no employment-law explanation of your alternatives either. The HR department works out the programme, not your case. What is clean for the company need not be the best outcome for you.

Your next step

The tax side is decided by points that are set out in the termination agreement: the termination date, when the severance payment falls due, the treatment of holiday, bonuses and garden leave. Once they are signed, the arrangement is over. Hence the order: have it calculated first, then negotiate, then sign. I review and negotiate the employment-law side and bring in a tax firm for the calculation. You will find more on dismissal, severance payments and termination agreements on my topic page Employment law. Send me the draft before you sign – not after.

Aledo Studio, a Munich property developer, provided the background information and the model calculation on the property side (www.aledo.studio). This article is general information and is no substitute for tax or legal advice on your particular case.

This article provides general information and is no substitute for legal advice in an individual case. Last updated: 2026-10-13.

Christian Czirnich, Rechtsanwalt (attorney at law), Kirchseeon near Munich

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