Severance pay in 2026 or 2027? How to choose the right time

Many of those who are currently receiving a severance pay offer will leave the company on 31 December 2026. This raises a question that hardly anyone has considered: will the severance payment be paid out in December or not until January 2027? It may sound like a mere formality, but it could mean the difference of tens of thousands of euros in tax.

Tip: You can see straight away how much tax you’ll have to pay based on your figures for each year using my Severance pay calculator →

Why timing matters so much

For tax purposes, it is the year in which the money is paid into your account that counts. If the severance payment is made in December, it is added on top of your full annual salary. This means that almost all of it will be taxed at the top rate of 42 per cent or even 45 per cent.

If it comes in January, things look different. In the new year, you often have very little other income – perhaps because you’re taking some time off or won’t be starting a new job until later. That’s exactly when the ‘one-fifth rule’ really comes into its own: it treats the severance payment as if it were spread over five years, and that’s particularly helpful if your other income is low.

Incidentally, from 2025 onwards, your employer will no longer take the ‘fifths rule’ into account when deducting income tax. You will only receive the relief via your tax return. You should therefore make sure to submit it in any case.

The calculation example

A single divisional manager is leaving the company on 31 December 2026. His taxable income for 2026 is €150,000. His severance payment amounts to €300,000. In 2027, he takes an extended break and has only around €20,000 in additional taxable income, for example from letting property.

Income tax for 2026 and 2027 combined:

• Payment in December 2026: approximately €179,400
• Payment in January 2027: approximately €157,900
• Payout in December 2026 and an IAB of €150,000 (investment of €300,000) in 2026: approximately €72,700
• Payment in January 2027 and an IAB of €150,000 in 2027: approximately €78,700

Calculated using the 2026 basic rate for both years, excluding the solidarity surcharge and church tax.

Without the IAB, January saves around €21,500 here. In December, the fifths rule makes hardly any difference with this salary. In January, however, it does make a difference because the remaining income is low.

With IAB, the picture changes: in that case, December is actually around €6,000 cheaper. The reason: in December, the IAB takes into account a salary that would otherwise be taxed at 42 per cent. In January, it applies to a year in which there is little taxable income anyway. Either way, with the IAB, the tax bill is over €100,000 lower than without any tax planning.

The lesson to be learnt: Always plan the timing and the IAB together. Which option works out best depends on your income in the following year.

Can I just change the time?

Yes, provided you agree on it in good time. Employers and employees are free to determine when the severance payment is due. The Federal Fiscal Court has confirmed this (judgement of 11 November 2009, IX R 1/09). The only important thing is that the agreement must be reached before the severance payment is due. The simplest way is to include the payment date directly in the termination agreement, for example, ‘payable with the January 2027 payslip’.

Many organisations with volunteering schemes are aware of this wish and are happy to accommodate it. Just ask before you sign up.

What the 2027 tax reform will change

The Federal Government is planning an income tax reform for 2027. The Cabinet approved the draft on 2 September 2026; the Bundestag and Bundesrat have yet to give their approval. The key points are:

• The basic allowance is rising from €12,348 to €12,564.
• The top tax rate of 42 per cent is not due to apply until income reaches around €70,600 (2026: €69,879).
• New: 45 per cent from as little as €250,000 of taxable income (previously from €277,826) and 47 per cent from €280,000.

Anyone who has hardly any other income in 2027 will be little affected by this, as the ‘fifths rule’ spreads the severance pay out over the calculation period. On the other hand, anyone who continues to earn a good income in 2027 and receives a large severance payment will move more quickly into the new tax bands of 45 per cent and 47 per cent. This makes December 2026 an even more attractive option. It is therefore always worth working out the figures for both options.

The IAB in the year of the payout

With the investment allowance, you can claim a tax deduction of up to 50 per cent of a planned investment in advance. This can be done through a small business of your own, such as a commercial solar panel system, a battery storage unit, a composting facility or a tiny house. Up to €200,000 in investment tax relief is available per business. The tax office will offset any loss from this business against your other income in the same year – that is, in the very year the investment is made.

Important: The IAB and the severance payment must fall in the same tax year. Anyone who sets the payment date for January 2027 is also planning for the IAB to be in 2027.

The IAB defers part of the tax to later years. Anyone who continues to have a high taxable income can make use of the IAB several times in future, thereby permanently reducing their taxable income.

What you need to bear in mind

• Arrange this in good time: The payment date must be fixed before the severance payment becomes due.
• Unemployment benefit: If you receive unemployment benefit after leaving your job, it is tax-free, but it does increase the tax rate on the rest of your income (progressive tax rule). This reduces the benefit you receive in January. Bear this in mind.
• Closing hours and closure: Whether a termination agreement triggers a waiting period for unemployment benefit has nothing to do with the payment date. Clarify this in advance with a specialist employment lawyer.
• Submitting your tax return: The ‘one-fifth rule’ now exists only on paper.
• The IAB project must be cost-effective. Making an investment purely for tax reasons has never been a good decision.

Frequently Asked Questions

Is a severance payment really cheaper in January than in December? Without the IAB, the answer is often yes, if you’re earning significantly less in the new year. With the IAB, December might work out cheaper, as the IAB then reduces a highly taxed salary. Work out the figures for both options.

Can I still change the payment date at a later stage? But only as long as the severance payment is not yet due. Once it is due or has been paid out, this is no longer possible.

How will the 2027 tax reform affect my severance pay? A small relief if your remaining income is low. If your taxable income in 2027 exceeds €250,000, the new tax rates of 45 per cent and 47 per cent will apply. The law has not yet been passed.

By when do I need to set up the IAB? For the year in which the severance payment is made. It is claimed on the tax return for that year.

Conclusion

When it comes to a severance payment at the end of the year, a single month can make a difference of over €20,000. However, which date is better depends on whether you’re using an IAB and how much you’ll earn in the following year. With an IAB, the tax liability in both cases is over €100,000 lower than for a December payment without tax planning. Work out the figures for both dates before you sign the termination agreement.

I’ll guide you through the process, from assessing your personal situation right through to decision-making and implementation. To this end, I’ll put you in touch with selected partners. Tax advice should be sought from your tax adviser. You can find out more about the IAB in my free e-book and in the article Severance pay in 2026: How BMW, Mercedes and others can keep more of their money.

This article is for general information purposes only and does not constitute tax or legal advice. Last updated: October 2026.