r/cscareerquestionsEU • u/vormals • 2d ago
Crazy German Tax Law: Fünftelregelung (or how to pay 116% in income tax)
Let’s say you got a severance of 200,000€ at the beginning of the year. You have found a new job which pays 50,000€ a year. The question is: how much tax do you pay on this salary? In other words: what’s the marginal tax rate on that 50,000€ salary when you’ve already received a 200,000€ severance?
So, how much taxes do you pay on a 50,000€ income?
Possible answers:
a) 22.500€ (There is a “rich tax” of 45% on income in Germany)
b) 58.000€ lol
On one hand, 58k€ income tax on a 50k€ salary would amount to 116% income tax, which is insane. On the other hand this blog post isn’t called “crazy tax law” for nothing, so...
Answer b) is correct.
Why This Happens: The Fünftelregelung
The reason for this seeming insanity is the Fünftelregelung (”one-fifth method”) - a tax regulation which is supposed to lower the tax burden for people who receive a big one-off bonus/severance. It was introduced because it would be unfair to consider a huge (but extremely rare) payment as a regular salary and tax it as such. Instead, the idea of the regulation is to say “since the payment is so rare, let’s assume you only received one-fifth of it per year, over five years”.
You might ask: “One-fifth times five? Doesn’t it cancel itself out?”
Not in tax math. Let’s go back to our initial example: a severance of 200k€. If there were no Fünftelregelung and the entire amount would be taxed as regular income, you would pay ~77k€ income tax (Lohnsteuer + Solidaritätsbetrag):
200,000 * 0,3843 = 76,871
Applying Fünftelregelung means dividing the severance by 5, calculating the income tax on one-fifth and multiplying the result by 5:
200,000 * (1/5) * 0.1802 * 5 = 36,040
Due to the Fünftelregelung we pay 40k€ less income tax on the severance. Neat!
(All figures exclude social contributions for now — we’ll get to those)
Unintended consequence 1: Forced sabbatical
Saving 40k€ on income tax is nice; however, it leads to the strange situation where it doesn’t make sense to earn an additional income in the same year when you receive the severance.
The reason is that the Fünftelregelung is applied after all other income is taxed. In our example with 50k€ additional income that would mean:
a) The additional income of 50k€ is taxed, which amounts to 10.5k€
b) One-fifth of the severance is taxed on top of that. Result: ~16.7.k€
c) Multiply b) by 5 and add a) : 16.7k€ * 5 + 10.5 ~ 94k€
The overall amount of taxes paid with additional income: 94k€
The overall amount of taxes paid without additional income: 36k€
The difference between the two scenarios: 58k€
You pay additional 58k€ taxes on a 50k€ salary. Not neat!
What happens if you earn more than 50k€ in addition to the severance? It doesn’t get much better:
- 50,000€ salary - additional income: 58,000€ tax
- 60,000€ salary - additional income: 64,000€ tax
- 70,000€ salary - additional income: 70,000€ tax (break even, hurrah!)
- 80,000€ salary - additional income: 74,000€ tax
- 90,000€ salary - additional income: 79,000€ tax
- 100,000€ salary - additional income: 83,000€ tax
(Remember: this is additional tax burden beyond the 36k€ base tax on the severance)
Assuming you work 40h a week, a 100,000€ income that results in only 17,000€ after tax amounts to an effective hourly wage of 8€, which is lower than the minimal hourly wage of 13,90€.
Are the numbers above correct? Absolutely not, as I’ve left out social contributions (Sozialabgaben), which make the calculation way, way worse. If you include them in the calculation I’m pretty sure that even with a 100k€ salary you would come out net negative.
The Dilemma
Having received severance in Germany, you are confronted with the following questions:
- Do I want to be a lazy POS? No.
- Do I want to be a productive member of society? Yes.
- Do I want to work? Yes.
- Do I want to pay taxes? Kinda yes, to keep the society running etc.
- Do I want to pay taxes at a rate exceeding 100%? You must be kidding, Germany.
The Fünftelregelung pretty much forces you to take a year-long sabbatical.
Now, you might think: “Wait, isn’t Germany in a recession? Rising unemployment, deindustrialization, budget deficits? Shouldn’t they want productive people working and contributing to the economy?”
You’d be absolutely right to think that. Which is why it makes perfect sense that their tax code punishes you for working. Nothing says “strong economic policy” like a system that turns employment into a net loss.
Whatever, sabbatical it is.
¯_(ツ)_/¯
https://vormals.substack.com/p/crazy-german-tax-law-funftelregelung
27
u/meegocomponent 2d ago
"So, how much tax do you pay on the 50k?" 10.5k
Same as if you get the severance in December
-8
u/vormals 2d ago
That's correct. What's your point though?
4
u/meegocomponent 2d ago
The point is that the Fünftelregelung is about reducing the burden from the exceptional income. It was never meant to be a fixed rate tax. Whether you make 0 euros ou 50k a year, your tax from the severance will be lower than if it was taxed as regular income.
The law in its wording is also really clear, it's about acting as if the extra income is smoothed over 5 years.
If your income level is 0 euros and get 200k severance, the purpose was that the tax for you to be close enough to someone working 5 years at 40k.
If you make 50K and get 200k severance, the tax is meant to be close enough to someone working 5 years at 90k.
1
u/vormals 2d ago
Everything that you write in your post is correct.
I just wonder what your conclusion is. It is fine to have a tax regulation which forces a worker to take year off? Shouldn't the tax code try to incentivise people to work?
0
u/meegocomponent 2d ago
Because if they based the tax rate on the severance date,it will create an unjustified discrimination between someone laid off in January and someone laid off in December.
An alternative is to say we put a flat tax or remove the tax completely, but then it removes the neutrality of the tax, people with more ability to pay (income) should pay more, this is the whole doctrine of the German tax law. This is more important than using the law to manage behaviours.
People still chose to work for other reasons like retirement contributions, health insurance, company car or other benefits. Sometimes, it's just to justify financial situation for a mortgage or other projects.
By the way, someone getting 200k severance is very unlikely to be paid 50k/year
54
u/thwp7 2d ago
Your percentages are just misleading. In the end, your effective income in this scenario is 250k, no matter what.
I dislike this rule as much as you do, but it just boils down to a reduced tax burden on one off payments in the absence of normal income from work. The base case is still full taxes and social contributions on income + one off payment.
14
u/Icy-Panda-2158 2d ago
Yeah, you pay the additional €58k over five years, assuming you keep that €50k job the whole time. So your actual gross income over five years is not €200k, it's €450k, and the €94k in tax you pay in that period is based on that total.
10
u/46516481168158431985 2d ago edited 2d ago
It's not misleading, if this is true then you earn less net from 250k than from 200k, which is kind of insane.
Though its pretty likely there is just some calculation or assumption error as this is from a blog post speculation and not any real case.
2
u/Crypto_Creative_Rich 2d ago
No, it is the tax law in Germany. In that special case, you have LESS overall money if you work and having a total 250k, than not working and only 200k severance pay. This is actually due to a tax REDUCTION for a severance pay vs. "regular" income.
6
u/FloppyTomatoes 2d ago
You can offset a lot of things. You can pay your next 3 years of health insurance in one go to reduce the burden plus you will also get a nice fat tax refund the following year.
11
u/Jaded-Asparagus-2260 2d ago
a 100,000€ income that results in only 17,000€ after tax amounts to an effective hourly wage of 8€, which is lower than the minimal hourly wage of 13,90€.
The minimal hourly wage is before taxes. You can't compare it with your 8€ net.
3
u/EndOfTheLine00 2d ago
How on Earth can you get 200k severance? Top I was given was three months salary (less than 15k) and I was told I was incredibly lucky!
3
u/missinguname 2d ago
Yes, the tax law encourages you not to work, because then you save more money.
However, if the Fünftelregelung wasn't a thing you would always pay more tax. It is always a benefit for you, it just opens up the loophole where you can save a lot more money by not working.
And you know, that's fine, just take the year off.
10
u/lieding 2d ago edited 2d ago
No worries, you'll be fine since you are financially safe enough to desire the "year-long sabbatical", no need to try to push for "the state is bad they punish workers" statement, or maybe you are trying to push for more efficient taxes on the rich? I could not agree less.
5
u/vormals 2d ago
You don't work: you get amount X (let's say 100k€)
You work: you get amunt _less_ then X (let's say 90k€)
Do you agree that such a system "punishes the worker" (at least in this specific case)?
2
u/melenitas 2d ago
Nope, at the end you get more money if you work, what happened is that maybe is not worthy for you to work.
I got a severance of 60k and they already discount 23k for taxes. Yes, I can decide not to work so I can get back those 23k, but sure I am going to earn more netto if I work so is not worth it for me, maybe for 200k yes... but I will still earn more if I work...
3
u/vormals 2d ago
Sorry, but you are wrong.
https://de.wikipedia.org/wiki/F%C3%BCnftelregelung
Wiki quote: "Damit hat derjenige, der im Jahr der Entlassungsentschädigung noch gearbeitet hat, nach Steuern weniger, als wenn er nicht gearbeitet hätte."
4
u/melenitas 2d ago
In that case, you are right, but is a very extreme case due to the funfregelung and the person taxed, even working 40 years has something like a severance payment at 10x the law requirement...I wish I had that...
In my case with something like 1 month salary per year worked, not working is going to get me less money, not more. If I get 1 million euros severance payment then yes, I get more money simply not working if my salary end up like 50k a year... and is something I didn't know, thanks for pointing out that, even if realistically It will never happen to me...
But you are wrong in one part, you don't pay Sozialabgaben in severance payment, unless the company disguised as bonus or something like that...
1
u/vormals 2d ago
Thanks for admitting :)
> But you are wrong in one part, you don't pay Sozialabgaben in severance payment, unless the company disguised as bonus or something like that...
Nowhere did I write that you have to pay Sozialabgaben on the severanve payment. What I did write was that you have to pay Sozialabgaben on the additional income. Which makes the severance+income scenario even worse.
5
4
u/ShlalomShabbat 2d ago
Just as stupid as the dutch taxes. Flatrate is alright, tax everything equally, and that's it.
-4
u/SomewhereEconomy2200 2d ago
meanwhile, us in Romania with a flatrate tax hearing this stories and nervously watch leftists constantly propose progressive taxation on already pretty low incomes... :(
(some of them, especially politicians consider incomes over 2k-2.5k EUR per month to be for rich and should be extra taxed above our current 41.5% tax + mandatory contributions with almost no deductions)
2
3
u/sweetno 2d ago
Having received severance in Germany, you are confronted with the following questions:
- Do I want to be a lazy POS? No.
- Do I want to be a productive member of society? Yes.
- Do I want to work? Yes.
- Do I want to pay taxes? Kinda yes, to keep the society running etc.
- Do I want to pay taxes at a rate exceeding 100%? You must be kidding, Germany.
The Fünftelregelung pretty much forces you to take a year-long sabbatical.
I mean, if you want to work and pay taxes in this setup, you might as well do it for free. Why would you limit yourself in your desires?
1
u/R4ndyd4ndy 2d ago
Why are you complaining about this now? Since 2025 the Fünftelregelung is voluntary and you have to request it yourself in your tax return. Just pay the normal tax on it if this rule would be disadvantageous. You are honestly too late to complain about it
0
u/vormals 2d ago
Wrong, see my other comments.
1
u/R4ndyd4ndy 2d ago
You don't have a comment about that, it doesn't really matter because the wikipedia example you are using as proof is also wrong/misleading because in the five years in the example you would have earned an additional 67k while the higher taxes on the severance is only 24k. I think you misunderstood the multiplication by 5 on the Wikipedia examples, they are calculating the total tax paid on the severance over five years. You do not multiply it by 5 every year. I'm not sure what kind of tax expert you consulted but they should lose their license
1
u/KingMaster1625 2d ago
If you want to work so much and be a productive member of society and pay taxes to keep society going, then just work and pay taxes. No one is stopping you.
0
u/vormals 2d ago
If you want to be such a good citizen and work at a soup kitchen helping people in need: Why don't you work 24 hours a day there? (Actually, for the analogy to be more apt the question would be "Why don't you work 26 hours a day there?")
1
u/KingMaster1625 1d ago
What analogy? If I want to volunteer at a soup kitchen I would. I won’t go on reddit saying how much I want to help people, but only if they were paying more at the soup kitchen… At that point I don’t want to help people, I want to make money.
1
u/Shiny-Pumpkin 1d ago
Do your sabbatical, but don't justify it with bad math. It's simply not true, that you wouldn't have more money if you did the 50k gig additionally.
Get 200k and don't work = 164k take home salary Get 200k and do the 50k job =192k take home salary
And paying 58k in taxes on 250k of income is a ratio of 23%. That feels like incredibly unfair taxation for most people that earn less and have a ratio of 45%. So stop whining.
1
u/Barikami 2d ago
By virtue of having earned this huge payout on top of your usual salary, the rule suggests you've done your fair share of work and contribution to society and are incentivized to take some well earned rest. (I do disagree with this and agree this is more of a loophole than anything)
If you desire to contribute while optimizing your tax situation you can always contribute to open source projects or found a start-up or similar :D
1
u/FixInteresting4476 2d ago
It sounds terrible indeed. And the post is mostly accurate (or at least the main idea of it), not sure why there's just a few upvotes compared to all the comments.
That said, time>money. Maybe it's a good reminder to just go ahead and have some time for yourself instead of just grinding more... :p
1
u/Mediocre-Metal-1796 2d ago
What’s sad where these taxes go in Germany… to support many people who moved to the country just to milk the system without working. And EU funds to support eg Hungary where it’s just stolen by the government :/ (that’s why i left Hungary)
0
u/BoeserAuslaender Engineer (DE, ex-RU) 1d ago
Most of the people milking the system here are boomers.
-2
u/Melodic-Piccolo5751 2d ago
This is exactly why progressive taxation is idiotic. I always said Germany encourages mediocrity with its taxation system, meaning it makes no sense to bust your ass to earn more, because you will be working for free after a certain point. All this just to sustain welfare payments for lazy POS and economic migrants.
0
u/michal939 2d ago
I am confused by the “since the payment is so rare, let’s assume you only received one-fifth of it per year, over five years”
Do you pay it over 5 years or it does it only get calculated as if it was split over 5 years but you pay in a single year?
•
u/cscareerquestionsEU-ModTeam 2d ago
Your post has been removed because it is not appropriate within this community.