Amid record-high inflation German Finance Minister Christian Lindner has announced that the threshold for taxable income is set to rise. The change could save families thousands of euros.
Lindner announces tax-free allowance rise
The finance minister has put forward a proposal which would see an increase in the threshold up to which tax doesn’t have to be paid on income. According to Lindner’s proposal the amount will increase by 561 euros, meaning that people working in Germany could earn up to 10.908 euros per year before paying income tax. The update comes after Lindner announced over the summer that the new limit would be set at 10.632 euros.
The proposal also includes a plan to increase the tax-free child allowance (Kinderfreibetrag) by 404 euros to 6.024 euros per year. This means that a family with two children could earn up to 33.864 euros in 2023 and not pay a single cent of income tax on their salaries.
If Lindner's proposal is approved by the cabinet, the Bundesrat and Bundestag, the new threshold will first be applied in 2024, to tax returns for 2023.
Germany takes precautions to minimise economic disaster
In September inflation in Germany hit 10 percent, the highest rate since 1951, and the past year has seen significant changes to the country’s social security system. The tax-free allowance rise comes in the wake of these events.
If Lindner’s proposal is not implemented, he has argued, the current economic concoction of ever-rising inflation, the energy crisis and social security payment adjustments is likely to lead to a so-called bracket creep. A bracket creep, or kalte Progression in German (literally “cold progression”), describes a scenario where workers must continue to pay tax despite the fact that their purchasing power per euro has decreased due to inflation.
“If the citizens’ allowance (Bürgergeld) rate is to increase in January, so should the threshold for income tax payments,” Lindner, the liberal FDP’s representative in the traffic light coalition, told tabloid newspaper Bild. “People receiving social benefits and working taxpayers deserve equal fairness.”