How are pension back payments taxed?
If you receive a pension back payment over a period longer than twelve months, this counts as remuneration for work over several years and is considered extraordinary income. This income can be taxed more favourably using the so-called one-fifth rule.
In this process, the eligible income is deducted from the taxable income, and then one fifth of it is added back. The income tax for the taxable income is then calculated, once with and once without the one-fifth amount. The difference is multiplied by five. This results in the tax for the extraordinary income.
The tax office automatically checks which calculation is more favourable for you. For the correct calculation, you must enter your received back payment separately. Enter any work-related expenses incurred in connection with the back payment (such as court or legal fees) separately as well.
Note: The Münster tax court ruled on 19 September 2019 (Ref. 5 K 371/19 E) that the reduced tax rate under § 34 EStG does not apply to a pension back payment relating to two assessment periods if the back payment is made in the second assessment period.
