Growth Opportunities Act: Changes in relation to the taxation of severance payments

At a glance

• The Growth Opportunities Act (Wachstumschancengesetz) contains changes to taxation of severance payments.
• From 2025, employers will no longer need to determine whether the fifths rule (Fünftelregelung) is applicable.
• The fifths rule will we be abolished without replacement.
• Employees will now have to apply for this tax reduction themselves.

The Growth Opportunities Act came into force on 28 March 2024. It includes changes to the taxation of severance payments under the fifths rule. This rule will no longer apply to wage tax deductions from 2025.

Currently, the fifths rule can be taken into account by the employer when calculating wage tax for certain wages, including severance payments, according to section 34(1) of the Income Tax Act (Einkommenssteuergesetz). By applying the fifth rule, wages will be subject to lower taxation, as income is distributed over five years. This means that the tax burden is considerably lower than if the severance payment had to be taxed as income within one year.

For the first time, the fifth rule for the 2025 income tax deduction will be abolished without a replacement. The purpose of this is to help make income tax calculations more simple and to remove some of the administrative burden on who will no longer need to check if the rule applies in each case.

Even though the fifth rule is being abolished, employees will not be disadvantaged because they can still claim the one-fifth rule when they’re assessed for income tax. However, employees will now have to apply for this tax reduction themselves.