Severance pay 2026: How to keep more of your payout from BMW, Mercedes & Co.

Anyone who has received a severance payment or has been offered one usually finds themselves asking one question: should I accept the offer or not? The second question is at least as important: how much of the money will I actually have left in the end?

The honest answer is often sobering. With a severance payment of €180,000 and a good annual salary, the tax office could take more than €100,000 of that. And the ‘one-fifth rule’, which many people pin their hopes on, often yields little or nothing in precisely these cases. In this post, I’ll explain why this is the case and what you can do instead.

Who is currently offering severance pay?

There haven’t been this many redundancy offers at the same time in Germany for a long time. Almost all major corporations are taking the same approach: no redundancies for operational reasons, but voluntary schemes offering severance pay, partial retirement or early retirement. According to public reports (as at October 2026):

• BMW: around 8,000 jobs worldwide; a voluntary redundancy scheme for employees in Germany not directly involved in production, running from October 2026 to the end of 2027
• Mercedes-Benz: Second round of the redundancy scheme in the indirect business areas, expected to start in December 2026
• Volkswagen: 35,000 jobs by 2030, just over 24,000 of which will be through partial retirement schemes, with the remainder through redundancy payments
• Porsche: a further 5,000 jobs by 2035, including through voluntary redundancy agreements and partial retirement schemes
• Lufthansa: The ‘New Ways’ programme: initially up to 550 full-time posts in administration, with a choice of a severance payment or paid leave
• SAP: During the most recent restructuring, nearly 3,500 employees in Germany left the company with a severance payment or took early retirement; further changes have been announced

Added to these are Bosch, ZF, Continental, BASF, Siemens and many small and medium-sized enterprises. In the case of BMW, VW and Mercedes, the media are reporting severance payments in the region of €400,000 to €500,000 for long-serving executives. With sums like these in particular, tax has a decisive impact on amounts that would otherwise take years to earn.

Important: I have no connection with any of these companies. Only your employer and your works council are aware of the binding terms and conditions.

The ‘one-fifth rule’ is often less helpful than you might think

A severance payment is fully taxable. There has been no tax-free allowance since 2006. What remains is the ‘one-fifth rule’: the tax office calculates the payment as if it were spread over five years. That sounds good, but there are two catches.

Firstly: The money will come later. From 2025, your employer will no longer be allowed to apply the ‘fifths rule’ when deducting income tax. They will initially deduct the full amount of income tax. You will only receive the reduction back via your tax return, which is often a year later.

Secondly: If you’re on a good salary, it hardly makes any difference. The ‘fifths’ rule merely smooths out the jump to a higher tax bracket. For those who are already subject to the top tax rate of 42 per cent on their standard salary – from a taxable income of €69,879 in 2026 – there is nothing left to smooth out. In the example below, it therefore amounts to exactly €0.

This is precisely where the investment allowance comes into play.

The incentive: Investment Allowance (IAB)

With the IAB, you can claim up to 50 per cent of a planned investment as a business expense in the year prior to the purchase. As an employee, you do not initially have a business for this purpose. You establish one by investing in a commercial solar power system or a battery storage unit. This makes you an entrepreneur for tax purposes.

The loss from this business will be offset against your other income in the same year, including your severance pay. And because this reduces your other income, the fifths rule suddenly comes into effect again. These two measures reinforce each other.

An example: An unmarried team leader is due to leave the company at the end of 2026. His taxable income from his salary amounts to €90,000, plus a severance payment of €180,000 in the same year. He is planning to purchase a solar panel system for €360,000 in 2027 and is making a capital allowance of €180,000 for this in 2026. His income tax for 2026:

• Excluding tax planning: €102,264
• Only under the one-fifth rule: €102,264
• Only with IAB: €26,664
• Including IAB and the one-fifth rule: €5,415

Calculated on the basis of the 2026 basic rate, excluding the solidarity surcharge and church tax. In the year the severance payment is made, tax is therefore reduced by just under €97,000.

Just so there’s no misunderstanding: this is not a tax exemption. Part of the tax is deferred to later years because the investment will then be generating profits and there will be less depreciation left to claim. The main benefit is that you save 42 per cent today and, later on – for example, in retirement – you’ll often be taxed at a significantly lower rate. On top of that, you can use the money from the tax office to keep working for years.

If you continue to have a very high income, you can benefit from this arrangement time and again by making use of the IAB on multiple occasions over several years.

In the year of purchase, there is also a special depreciation allowance of up to 40 per cent. This is worth considering if you go on to earn a good salary afterwards.

By the way: If you have a say in your retirement date, be sure to work out the figures for the option ‘retirement on 31 December, payout in January’ as well. Without any other income in the following year, the tax bill in this example would amount to around €29,900 solely as a result of the fifths rule. Both options can also be combined.

Company pension as a lump sum

Many people opt to have their occupational pension scheme paid out in a lump sum when they retire. In the case of a direct insurance policy, a pension fund or a pension scheme into which tax-free contributions have been paid, the entire payout is taxable.

And in most cases, the ‘one-fifth rule’ does not even apply here. The Federal Fiscal Court confirmed this in its judgement of 30 October 2025 (X R 25/23) where the contract provides for a choice between a pension and a lump sum. This is the case with most contracts. The situation may be different in the case of a direct commitment or a support fund.

So anyone who receives €250,000 from their direct insurance policy and also earns a good income on top of that will pay their full tax rate on it. In this case, the IAB is often the only real option you have left. Try to sort this out before the payout, if possible, but at the very latest before submitting your tax return for the year of the payout, as the IAB and the payout must fall within the same tax year.

What you need to bear in mind

As I’ve said in my other posts: making an investment solely for tax reasons has never been a good decision. Here are the points you need to be aware of:

• 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 investment must be worthwhile. If there is no genuine intention to make a profit, the tax office may classify the whole thing as a hobby. In that case, the tax benefit is lost entirely.
• Not every IAB project is suitable. There must be a movable asset that is eligible for IAB, and it must be used for commercial purposes.
• Profit threshold: Your business may make a maximum profit of €200,000 in the year of the deduction. This is not usually a problem for a new installation.
• The money is tied up. A solar panel system has a lifespan of 20 years or more. Make sure you have enough savings set aside for the period after you change jobs.
• First employment law, then tax. A termination agreement may result in a waiting period for unemployment benefit. Have the agreement checked by the works council or a specialist solicitor.

My timetable for you

1. Clarify the departure and payment dates. These are often negotiable in volunteer programmes.
2. Work out both scenarios: with and without the investment.
3. Examine the specific project: location, technology, grid connection, contracts, operational management.
4. Make a note of your intention to invest and claim the IAB on your tax return for the year in which you received the severance payment – even retrospectively, provided you have not yet submitted it.
5. Have your tax adviser check everything and include it in your tax return.

Frequently Asked Questions

Is my severance pay tax-free? No. It is fully subject to income tax. Social security contributions are not usually payable.

As an employee, can I use an IAB at all? Yes, through your own small business, such as a commercial solar panel installation. Any loss incurred from this will be offset against your wages and severance pay.

By when do I need to take action? The IAB is calculated for the year in which the severance payment is made. This can also be done retrospectively, provided that the tax return for that year has not yet been submitted. So, if the severance payment is from 2024 or 2025, it may not be too late yet.

Does that also apply to my direct insurance policy? Yes, precisely there, because the one-fifth rule does not usually apply to capital distributions.

Conclusion

Anyone who has received a severance payment in the last two years, or who is due to receive a severance payment or a substantial occupational pension in 2026 or 2027, can easily end up losing five- or six-figure sums without proper planning. The ‘one-fifth rule’ alone is usually not enough for those on a good income. Combined with a thoroughly vetted IAB project, the picture looks very different.

I will personally guide you through the process, from the initial assessment right through to implementation, and put you in touch with the selected partners. The tax assessment of your situation should be left to your qualified tax adviser. Please feel free to get in touch to find out more about your individual situation. You can find a clear explanation in my free e-book on the IAB.

Yours,

Michael Rehberger

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