HR-Glossar

Fünftelregelung (one-fifth rule for extraordinary income)

How the one-fifth rule eases tax on a lump sum, why the payment must fall in a single year and why payroll no longer applies it.

1. What is Fünftelregelung (one-fifth rule for extraordinary income)?

The Fünftelregelung is a method of taxing extraordinary income at a reduced rate under Section 34 EStG. It softens the effect that a single large payment – typically a severance payment – pushes the recipient into a higher progression band in the year it is received and is therefore taxed disproportionately.

The method calculates as though the payment were spread over five years: the tax on income without the extraordinary item is determined, then the tax on the same income plus one fifth of it. The difference is multiplied by five. The result is the tax on the one-off payment.

So the payment itself is not spread over five years – it is received and takes effect in one year. Only the progression effect is stretched. Where the marginal rate is already at the top end, the rule therefore achieves little or nothing.

2. Origin and development

The provision has existed for a long time; it owes its significance to severance cases. The thought behind it: someone who works towards an entitlement over years and receives it in a single year should not be taxed more heavily than someone receiving the same amount over time. That is an argument about fairness against the annual basis of income tax, not a subsidy.

For payroll the provision has recently changed fundamentally. Formerly the employer applied the one-fifth rule directly in the wage tax deduction; the relief arrived with the payslip. That possibility has fallen away: Section 39b(3) EStG in its current version no longer refers to Section 34 EStG.

The employer's role has changed with it. It withholds the ordinary wage tax on a non-recurring payment. The individual obtains the relief themselves – through the income tax return, and therefore only in the following year.

3. Core principles and how it works

Extraordinary income only

What qualifies is the income listed in Section 34(2) EStG, for employment above all compensation payments under Section 24 no. 1 EStG. A bonus or a profit share is not compensation – it does not qualify.

Concentration in one year is a condition

The compensation must be received in concentrated form in one assessment period and must result in the individual receiving more in that year than they would have on undisturbed continuation of the employment. Spreading the severance over two years regularly forfeits the relief.

The calculation stretches the progression, not the payment

Five equal steps up the tax scale instead of one large one. Receipt remains in a single year, for social security purposes as well.

The relief falls as income rises

Anyone already at the top rate gains nothing: one fifth more no longer moves the marginal rate. The rule works hardest on middle incomes with a large lump sum.

It takes effect only on assessment

The employer no longer applies it. The relief arises with the income tax return – the tax office tests the conditions and applies the more favourable calculation of its own motion.

4. Who is Fünftelregelung (one-fifth rule for extraordinary income) relevant for?

- Employees receiving severance – for them the rule is the biggest lever on the tax burden. - Employers and payroll – they withhold in the ordinary way and must be able to explain why the payslip shows no relief. - HR in restructurings – in termination agreements and social plans the payment date is a tax-relevant lever. - Works councils – in shaping a social plan, how the payment is spread determines the net effect for those concerned. - Tax advisers – testing the concentration requirement is case-by-case work.

5. How it differs from related terms

- One-fifth rule and severance – the severance is the payment, the rule is how it is taxed. Not every severance meets the conditions. - One-fifth rule and non-recurring payment – in payroll terms a severance is a non-recurring payment and is taxed as such; the relief is a matter for the assessment, not the deduction procedure. - One-fifth rule and social security – a genuine severance for the loss of the job is not remuneration and is therefore contribution-free. That has nothing to do with Section 34 EStG; the two questions are simply often asked together. - One-fifth rule and the progression proviso – the progression proviso raises the rate, the one-fifth rule lowers it. Both can operate in the same year.

6. Variants and adaptations

Three constellations decide success or failure:

- Payment in a single amount – the standard case and the safest structure for the concentration requirement. - Payment across two calendar years – endangers the concentration and with it the relief. A minor part-payment in another year is tolerated by the case law; where the line runs is a question of the individual case. - Deferral into the following year – sensible where a high level of ordinary pay has already arisen in the year of leaving. Moving the date of receipt is permissible but must be agreed before the entitlement arises.

7. Advantages and challenges

Advantages

  • Noticeably softens the progression peak of a single large payment
  • Operates of the tax office's own motion – no application is needed
  • Particularly effective on middle incomes with a large severance
  • Creates a calculable framework for social plans and termination agreements
  • The conditions are well settled by case law

Challenges

  • Since it fell away from the wage tax deduction it takes effect only with the following year's assessment
  • The liquidity gap in between regularly surprises those affected
  • On high incomes the relief is small to nil
  • The concentration requirement fails quickly where the payment is spread over two years
  • Not every severance is compensation within the meaning of Section 24 no. 1 EStG

8. Best practices for implementation

Explain the missing relief on the payslip

People expect the relief to show on the payslip because it used to. A note with the payslip – ordinary withholding, relief through the tax return – heads off the query and the suspicion behind it.

Choose the date of receipt deliberately

Whether the severance is received in the year of leaving or the following year can matter considerably. That question belongs in the negotiation of the termination agreement, not in payroll.

Avoid part-payments across the turn of the year

They endanger the concentration requirement and with it the entire relief. Where a split is unavoidable, it belongs in front of a tax adviser beforehand.

Use the binding ruling where uncertain

Section 42e EStG allows the employer to ask its local tax office for a binding answer. That is the safe route where classification as compensation is doubtful.

9. Tips for employers and employees

For employers

  • **Do not apply it in the wage tax deduction** – Section 39b(3) EStG no longer refers to Section 34 EStG
  • **Process the severance as a non-recurring payment** – the relief is a matter for the assessment
  • **Fix the date of receipt in the agreement** – it is the most effective lever
  • **Manage expectations actively** – anyone looking for the relief on the payslip will not find it

For employees

  • **File a tax return** – without one the relief never reaches you
  • **Plan your liquidity** – the relief arrives only with the following year's assessment
  • **Do not split the payment** – spreading it over two years can cost you the relief entirely
  • **Calculate realistically on a high income** – at the top rate the rule brings hardly any relief

10. Conclusion

The one-fifth rule stretches the progression, not the payment: it calculates the tax as though a severance were spread over five years, while letting it be received in one. Its effect therefore depends on the individual marginal rate – considerable on middle incomes, close to nil at the top rate. A cost model that books the relief as a fixed percentage is booking something that varies by person.

For practice the most important point has shifted: the employer no longer applies the rule in the wage tax deduction – Section 39b(3) EStG in its current version no longer refers to Section 34 EStG. It withholds in the ordinary way, and the relief arises only with the income tax return. Failing to reflect that in the termination agreement and in the communication creates a liquidity gap and a disappointment, both of which were avoidable. The second lever remains the concentration requirement: a severance spread over two years regularly loses the relief altogether.

Sources

Related terms

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