2025 tax changes: What businesses and individuals in Germany need to know
By Richard Augustin
Tax Services for Expats are experts at dealing with expat tax matters in Germany. Founder Richard Augustin updates you on the key changes to taxes in Germany in 2025.
Staying informed about tax changes isn’t just smart; it’s essential. Shifting regulations in Germany can directly impact your finances, as well as your administration and bookkeeping, from income declarations to filing deadlines.
Whether you're freelancing, working, retiring or investing, keeping up to date helps you avoid costly mistakes and seize available benefits. This is what you need to know about the 2025 changes.
Key tax changes in 2025 for individuals in Germany
Take a look at how the 2025 changes to tax thresholds and procedures will affect you:
1. Income tax rates and brackets
As of January 1, 2025, the tax-free basic allowance (Grundfreibetrag) has increased from €11.604 to €12.096. Additionally, the income tax scale has been adjusted for inflation (“cold progression”).
The 42% top rate now applies at €68.481 (up from €66.761), while the 45% rate remains applicable above €277.826. For married couples, all these amounts are doubled when filing jointly.
2. No fifth method in payroll for severance payment or share option programmes
Starting in 2025, employers will no longer apply the Fünftelregelung (one-fifth rule) while doing payroll. Instead, employees must claim it through their annual tax return, and only tax authorities will apply it.
This may result in an over-deduction of wage tax during payroll, which can be claimed back by filing a tax return.
3. Lohnsteuerermäßigung applications every two years
Requests for income tax reductions (such as for work-related expenses or special allowances) must now be filed every two years instead of being open-ended.
4. Tax class changes require an application
Changes to your tax class (for example, moving from I to III or IV) are no longer automatic. If you wish to change your tax class from 2025 onwards, you'll need to formally apply for the change at your local tax office.
Why these changes matter for expats
These changes affect your take-home pay, potential tax refunds and proper reporting of one-off income. Being proactive - submitting tax class updates, renewing tax reduction applications and claiming tax relief - is key to avoiding surprises and optimising your tax position.
Want to understand more about these changes? Talk to Tax Services for Expats today
Key tax updates for businesses in 2025
These are the new tax rules affecting businesses that came into effect in 2025:
1. Small business rule (Kleinunternehmerregelung)
A major change taking effect in 2025 is the introduction of higher turnover limits for small businesses. The previous gross thresholds of €22.000 and €50.000 have been superseded by net limits of €25.000 (for the previous year) and €100.000 (for the current year).
If your business turnover has already exceeded the previous (lower) threshold, however, the small business rule is no longer applicable. It is highly recommended that clients double-check their revenue (not profit). If the €100.000 threshold is exceeded mid-year, the exemption ends immediately and from that point you must collect and pay VAT.
In a rare reduction of reporting obligations, no annual VAT return will be required for small businesses in Germany from 2025 onwards.
2. EU-wide harmonisation and reporting
As part of harmonising rules and reporting regulations across the EU, non-German EU small businesses can now use Germany’s small-business rule and vice versa.
A Kleinunternehmer-ID (KU IdNr.) is required for cross-border use, and quarterly reports to the Federal Central Tax Office (BZSt) are mandatory.
3. E-invoice obligations
In a move to get Germany more in line with the modern, digital world, B2B invoicing recipients must accept e-invoices (structured formats such as XRechnung) from 2025.
Small businesses are exempt from issuing e-invoices until 2028, but must still be capable of receiving them.
4. Simplified VAT returns and record keeping
In another move designed to reduce the reporting burden on small businesses, the threshold for monthly instead of quarterly VAT pre-filing has been raised from €7.500 to €9.000 annual liability, and the record retention period for accounting documents has been reduced from 10 to eight years.
What these changes mean for expat or EU-based small businesses
If you have a small business in Germany, you should take note of these changes:
- Plan carefully: Monitor revenues in real-time to avoid a mid-year exit from exemption.
- EU expansion: Cross-border services are now easier to manage, but documentation and reporting requirements have increased.
- Upgrade systems: Ensure your invoicing and accounting systems are e-invoice ready and properly registered.
- Simplified compliance: Quarterly filing thresholds and shorter archiving ease administrative load.
Tax Services for Expats takes care of the tax issues of individuals, freelancers and companies in Germany, clearly and concisely explaining them in understandable English. Whether you need help with e-invoicing, your tax declaration or reporting requirements, you can book an appointment directly or email them at [email protected].
Richard Augustin