As part of the government’s recently announced budget plan for 2025, the German tax system is set to see some changes. Here’s how the proposed changes may affect you.
Under Germany’s new budget plan, several changes will be made to the tax system in 2025.
All of the below changes to the basic allowance, tax on middle-income earners, the tax break for foreign workers, changes to spousal splitting and the tax-free child allowance still need to be approved and will be voted on by ministers on July 24. Some minor amendments could be made in the meantime.
In Germany, low-income earners aren’t obliged to pay income tax if they earn below a certain amount, known as the “basic allowance” (Grundfreibetrag). In 2025, the Grundfreibetrag amount that people can earn and not have to pay tax on their income will increase by 300 euros to 12.084 euros per year. In 2026 it will rise to 12.336 euros.
In this year's budget, the Grundfreibetrag went up from 10.908 euros to 11.604 euros from January 1, 2024. However, Federal Finance Minister Christian Lindner (FDP) has announced that on January 1, 2025, the Grundfreibetrag threshold for 2024 will retroactively increase to 11.784 euros.
These thresholds will apply when you submit your annual taxes for 2024 and 2025.
For those who earn more than the Grundfreibetrag threshold, there will also be changes to income tax laws. Lindner has suggested that Germany’s general income tax rate will be adjusted for 2025 and 2026 to offset real wage losses caused by inflation.
The size of this general income tax cut will be proportional to inflation but is yet to be determined.
Under Lindner’s proposed plan, international workers who come to Germany would benefit from a rebate on 30 percent of their salary before tax during their first year of employment. In the second year, the rebate would be 20 percent and in the third year, 10 percent.
However, the new rules would only benefit workers within a particular income bracket, and this bracket is yet to be determined. If the policy were approved, the applied income brackets and tax refund amounts would be re-assessed in five years.
According to 2022 figures from the Leibniz Institute for Economic Research, workers in Germany with a residence permit earn on average 13 percent less than employees with a German passport.
Since 1958, married couples in Germany have enjoyed a generous tax break thanks to the Ehegattensplitting law. This means that if couples decide to file their taxes jointly, their salaries will be added together and then halved.
When they are filing their taxes, married couples can belong to one of three tax classes, depending on whether or not they earn equal incomes. These classes are:
Ehegattensplitting permits married partners to swap tax brackets three and five, so the high-income earner is charged at a lower rate, and the lower-income earner is charged at a higher rate, meaning less money is taxed from the combined earnings.
However, in 2023, the coalition announced plans to scrap Ehegattensplitting due to criticism that the tax break compounds gendered income inequality.
Instead, a new tax class will be added, “tax class four (factor method)”, where both spouses are taxed as if they were single and then tax deductions are applied as if both partners equally earned half of their combined income. The amount of money received in tax benefits will be similar to that granted using the Ehegattensplitting method.
In the long term, Lindner has announced that the tax classes three and five will be abolished by 2030.
Another tax change for families. The tax-free child allowance (Kinderfreibetrag) is a tax deduction which parents in Germany get for each of their children, which means they will have more money after tax to support their child.
From 2025, the tax-free amounts income amounts will rise by 60 euros to 6.672 euros (combined monthly income of both parents) and in 2026 it will rise by 156 euros to 6.828 euros. Child benefits (Kindergeld) will also go up by 5 euros per month from 2025.
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