A higher basic allowance and more benefits for parents: Germany is pushing forward with its major income tax reforms, aimed at relieving low and middle income households. So how much can you really expect to save?
Germany’s Federal Cabinet on Wednesday adopted the draft tax for Finance Minister Lars Klingbeil’s tax reform.
Altogether the reforms are said to bring relief tax relief for low- and middle income households, with this relief counter-financed in part with higher taxes on households with very high incomes. In total, the government expects to reform to amount to €10 billion in income tax relief from 2028.
Some of the tax reform measures were hotly debated between the centre-left Social Democrat (SPD) and centre-right Christian Union (CDU/CSU) factions in the federal government. Now, in approving the draft bill, the black-red coalition is projecting agreement and support for the measures.
However, the bill still needs to pass the Bundestag and Bundesrat before it would be enacted as law, which means there may be further debate, and possibly some changes, to come.
Here’s a look at the tax changes that the cabinet has approved.
In Germany, tax payments are not determined directly from gross salary, but from “taxable income” after deduction of allowances and deductible expenses.
Basic tax-free allowance raised
The amount of income that remains tax-free for all is to be raised: from €12,348 this year to €12,564 in 2027 and then to €12,900 in 2028.
Top tax rate
For the income above the basic tax-free allowance, there are tariff zones in which taxation also increases with increasing taxable income.
The top tax rate of 42 percent is to be raised slightly to start from €70,600 instead of the current €69,879. This will make the increase in the tax rate for the income zone between €17,800 and €70,600 somewhat flatter, according to the ministry.
Which means slightly less tax burden on middle incomes.
Wealth tax split in two groups
The existing “rich tax” (Reichensteuer) for extremely high incomes is to be split up.
So a tax rate of 45 percent is to apply for taxable income over €250,000 in future, instead of €277,826 as before.
Above that, a new “super-rich tax” (Superreichensteuer) of 47 percent is to kick in for income over €280,000.
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Employee lump sum
For employees, the lump sum with which one can claim business expenses, such as travel expenses or office supplies, is to be increased from €1,230 to €1,430.
Children
The child benefit (Kindergeld) is being raised from €259 per child per month to €267 per child per month next year, and then to €272 in 2028.
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The child allowance (Kinderfreibetrag)is to rise from €9,756 to €10,056 and then to €10,236.
Sunday surcharges
The maximum basic wage that can be taken into account for tax-free bonuses for Sunday and holiday work is to rise from €50 to €75. Employees should thus be able to keep more of their bonuses.
In the case of craftsmen’s services, the possibility of being able to deduct them from tax is to be reduced somewhat.
What does this mean for you?
These reforms are expected to bring tax relief to the vast majority of taxpayers, according to the Ministry of Finance.
The ministry provided a couple example calculations: A couple consisting of a caregiver and a bus driver and two children, each earning €2,800 gross per month, could expect to save €632 in 2028.
Families with children can expect more tax savings under Germany’s current reform plans. Photo: Gustavo Fring / Pexels
For an individual such as an engineer with a gross income of €5,000 per month, the tax relief in 2028 would be around €192.
While any tax relief would likely be welcomed by most tax payers, critical voices have already spoken up to suggest that the coalition’s win for working families may not be as significant as the country’s leaders would like to suggest.
The German Trade Union Confederation (DGB), for example, said the relief is unlikely to compensate for inflation and therefore will not significantly strengthen the purchasing power of employees.
Green parliamentary group vice-chairman Andreas Audretsch told the Rheinische Post that small relief from the tax reform would be counteracted by many burdens in other taxes and benefit cuts.
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Meanwhile, in defence of the nation’s biggest earners, the German Chamber of Industry and Commerce (DIHK) complained that the increase in the tax on the rich was in fact a “tax on small and medium-sized businesses”.
What’s next?
The draft will now go to the Bundestag and Bundesrat.
To see their reforms passed, the coalition will need the support of the German states (as represented in the Bundesrat) which also receive 42.5 percent of income tax revenues.
Further changes to the bill could also be put on the table in the Bundestag.
The government wants to have the reforms in place by January 1st, 2027, with some of the included rate hikes set to kick in one year later at the start of 2028.
With reporting by DPA.
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