What does the German gov’t’s new reform package mean for you?

The German government has announced a major reform package, titled “A programme for economic recovery and employment”. New laws will apply to everything from work contracts to pensions, high-income taxes to sick notes. We break down what the changes mean for you:

German government announces reform package

At a press conference on Thursday morning, Germany’s CDU/CSU-SPD coalition government announced what Finance Minister Lars Klingbeil (SPD) called its “biggest reform package yet”. 

After around seven hours of talks, the coalition agreed on the new policies late on Wednesday evening. Introducing the reform on Thursday morning, Chancellor Friedrich Merz (CDU) said the policies would ensure “more competition, flexibility for businesses, less bureaucracy, the retention of our welfare state, and relief for employees and businesses”.

Klingbeil said it was clear that in such turbulent times, “nothing can be left as it is”, that the “necessary reforms [...] required compromise”, but that he was certain they would bring more “cohesion in our country” and “security for future generations”.

Following the reform agreement and announcement, the government is expected to pass the package before parliament breaks for summer recess on July 10.

What does the German government plan to reform?

The major reform package covers everything from income taxes and employment contracts to pensions, sick notes by telephone and more. Let’s take a closer look at the new policies: 

Pension reform will go ahead

Merz and Labour Minister Bärbel Bas (SPD) confirmed that they will push ahead with a 33-point proposal to reform the German pension system. The proposal was assembled by a 13-person expert commission and initially announced in late June.

Of the 33 points, several policies would directly impact a significant proportion of the population. These include: tying the retirement age to life expectancy, scrapping early retirement, investing pension funds in capital markets, and requiring freelancers to pay into the statutory pension system.

You can find out more about the pension reform plan in our article, How would Germany’s 33-point pension reform impact you?

Some tax relief for middle-income families

Starting January 1, 2027, the German government will change how it taxes income. According to the reform outline, “The relief measures are designed to have the greatest impact on families with children; in this way, the coalition is specifically making everyday life easier for families.”

This means that by 2028, a family of four, where the parents are in full-time work and earn a total income of 60.000 euros before tax, could see tax savings of around 600 euros per year.

Higher-income earners will be taxed more

To finance tax relief for middle-income families, the government will increase taxes on high-income earners.

Germany currently has four tax brackets. Those who earn less than 12.096 euros per year are exempt from paying income tax. Those who earn between 12.096 and 68.480 euros annually are progressively taxed between 14 and 42 percent. 

Those earning between 68.481 and 277.825 euros annually are taxed at 42 percent. Then there is the “wealth tax”, but this actually still only taxes income, not total wealth. Those who earn more than 277.826 euros annually are taxed at 45 percent. Only 4 million of the 83,9 million people in Germany are taxed at the 45 percent rate.

Going forward, the top tax rate will be split. Those who earn between 250.000 and 280.000 euros will still be taxed at 45 percent, while those who earn over 280.000 euros will be taxed at 47 percent.

Fixed-term work contracts for up to four years

Currently, employers in Germany can hire employees on a fixed-term contract, which can be renewed up to three times, provided the total length of employment does not exceed two years.

Going forward, employers will be able to hire employees on fixed-term contracts for up to four years. However, this new policy will only remain in place until the end of 2030.

Less protection against dismissal for high-income earners

From 2027, it will be easier for employers to terminate the contracts of high-income employees “with a severance pay option”. This will apply to employees who are paid at least 1,75 times over the pension contribution assessment ceiling (Beitragbemessungsgrenze), which changes annually.

Currently, it would apply to employees who earn an annual salary of just under 180.000 euros before tax.

Three tax-free allowances will increase

The government will also increase three tax-free allowances: the basic allowance (Grundfreibetrag), the tax-free allowance for children (Kinderfreibetrag), and the employee lump-sum allowance (Arbeitnehmerpauschale), but it is yet unclear by how much.

Child benefit will increase

The government will also increase child benefit payments. As of 2026, the child benefit in Germany is 259 euros per month, per child, regardless of parents' income. This will be increased in two stages to 272 euros per month by 2028.

Flat-rate tax on mini-jobs will rise

The government will increase the flat-rate tax on mini-jobs from 2 to 5 percent. This means employees on a mini-job contract will receive less of their earnings after tax, but more of their income will go to pension contributions.

No more sick notes by phone

Merz and Health Minister Nina Warken (CDU) have long been pushing for the government to scrap a law which allows doctors to issue sick notes to their patients via phone.

The policy was first introduced by the SPD-FPD-Greens coalition in the early days of the coronavirus pandemic, initially extended and then permanently adopted in late 2023, in an attempt to ease pressure on stretched doctors’ practices.

Going forward, patients will have to visit a doctor’s practice in person to obtain a sick note and will be required to submit it to their employer from the first day of illness.

Merz asks for understanding, the Left gives criticism

While the government hammers out more of the reform details and the package goes to a vote in the Bundestag, Merz asked people in Germany to be understanding. 

“The people of our country want decisions, not disputes,” Merz said at the chancellery press conference. “And that is exactly what we have delivered. But we also have a request for you: get involved! Support us in the reforms that are now necessary.”

“I understand the longing for the old, for what has gone before, for the past. But we cannot hide in the past,” the chancellor warned.

The Left Party has already heeded Merz’s appeal to get involved, but not by offering unquestioning support. Speaking on WDR 5 radio, leader Ines Schwerdtner said the reform was a “sleight of hand” that would fail to provide most people with any real relief.

Schwerdtner said the reforms would do “far too little” and ultimately mean “people have to work longer and have less money in their pockets”. She emphasised that the government’s increase in high-income taxes would not “really tackle” rising wealth inequality.