Have you received a large severance payment? Here’s how to claim back some tax

Many people only realise it when they see their payslip: there is significantly less of their severance pay left than they had expected. This is not down to a mistake on the part of your employer. Since 2025, they have no longer been permitted to apply the ‘one-fifth rule’ when deducting income tax. They therefore initially deduct the full amount of income tax.

The good news is that your tax return has the final say. And there’s often still quite a bit to be gained from it.

Tip: You can see straight away how much of your severance pay you’ll be left with after tax using my Severance pay calculator →

Step 1: Submit your tax return

You can only benefit from the one-fifth rule if you submit a tax return and declare the severance payment as compensation. The tax office will then check for itself whether the reduced tax rate is more favourable for you. Anyone who does not submit a tax return is throwing money away.

The ‘one-fifth rule’ is most beneficial if your other income in the year of the severance payment was low and the severance payment itself is not too high. If, on the other hand, you have a high salary or a severance payment of several hundred thousand euros, it often offers little benefit.

Step 2: Catch up on the IAB

The second – and usually larger – incentive is the investment allowance. This allows you to claim up to 50 per cent of a planned investment against your tax liability, through your own small business, such as a commercial solar panel system, a battery storage unit, a composting facility or a tiny house. Up to €200,000 is available per business.

The key point is this: the IAB does not need to have been finalised at the time of payment. As long as your tax return for the year in which the severance payment was made has not yet been submitted, you can still claim it there. It is often even possible to do so afterwards, provided the tax assessment notice has not yet become final. This usually happens one month after you receive the notice. Your tax adviser can clarify whether this is still possible in your case.

So, if you received your severance pay in 2025 or 2026, it’s worth taking a closer look now.

The calculation example

A single divisional manager with an annual salary of €150,000 left the company at the end of April 2025. Up until then, he had had taxable income of around €50,000. In May 2025, he was paid a severance payment of €300,000. He had no further income in 2025 after that.

Income Tax 2025:

• Excluding the one-fifth rule (as with payroll tax deductions): around €138,300
• Using the ‘one-fifth rule’ on the tax return: around €133,700
• Under the fifths rule and with an IAB of €150,000 (investment of €300,000): around €36,600

Calculated using the 2025 basic rate, excluding the solidarity surcharge and church tax. The actual income tax deduction may vary slightly.

The tax return on its own would only yield a refund of around €4,600. With such a large severance payment, the ‘one-fifth rule’ is of little help. With the IAB, however, the figure is around €101,700. The tax return for 2025 has not yet been submitted – so it is not too late.

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.

Step 3: Keep an eye on deadlines

• Without a tax adviser The deadline for the 2025 tax return is 31 July 2026. Anyone who is obliged to submit a return and has missed the deadline should submit it as soon as possible. Anyone submitting a return voluntarily has four years to do so; for 2025, this means by the end of 2029.
• With a tax adviser A significantly longer deadline applies: for 2025, the deadline is the end of February 2027 (extended to 1 March 2027 due to the weekend).
• Following the decision You have one month to lodge an appeal.

Even so, submitting the application at the very last minute is not a good idea. An IAB project requires some lead time, and the investment must be made within three years.

What about older severance payments?

For severance payments made up to 2024, the employer will usually have already taken the ‘one-fifth rule’ into account when deducting income tax. In this case too, an IAB is only possible if the tax assessment for that year can still be amended. This is rather the exception, but it is worth looking into.

What you need to bear in mind

• The investment must go ahead. You must redeem the IAB within three years by making an actual purchase. Otherwise, it will be cancelled with retroactive effect, and the tax will be reclaimed with interest.
• The business has to be genuine. If there is no intention to make a profit, the tax office may classify the whole thing as a hobby.
• The project must be profitable. Making an investment solely for tax reasons has never been a good decision.
• This also applies to the company pension scheme: All of this applies equally to a direct insurance policy or pension fund where benefits have been paid out. Since a ruling by the Federal Fiscal Court (BFH), often not even the one-fifth rule.

Frequently Asked Questions

Why has my employer deducted so much tax? Since 2025, he has no longer been applying the ‘one-fifth rule’ to income tax deductions. You will only receive the relief via your tax return.

Will I be automatically covered by the one-fifth rule? Only if you submit a tax return and declare the severance payment as compensation. The tax office will then check for itself whether this is more favourable for you.

Can I still use the IAB after the payout? Yes, often. As long as you haven’t yet submitted your tax return for the year in which you received the severance payment, you can claim it there. In some circumstances, you may still be able to do so afterwards, provided the tax assessment can be amended.

Is an IAB still worthwhile even when severance payments are very high? That is precisely when. Where severance payments amount to several hundred thousand euros, almost the entire sum is taxed at 42 or 45 per cent, and the ‘one-fifth rule’ offers little help. If one business is not sufficient, the IAB can be topped up through another independent business, for example one run by a spouse.

Conclusion

A severance payment you have received is not yet finalised for tax purposes. It is only when you file your tax return that it is determined how much you will ultimately pay. The ‘fifths rule’ often recovers several thousand euros. If you file an IAB in the year the severance payment is made, this can amount to over €100,000 for large severance payments. It is important that you take action before the tax assessment becomes final.

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.

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