How will changes to German tax rates impact you in 2025?

Germany’s tax regime is due to undergo changes in the next few years with Federal Finance Minister Christian Lindner proposing the following tax reforms that will impact German citizens and foreign residents in Germany due in 2025. From alterations to fundamental salary supplements to brand new entitlements for overseas employees, these alternations may significantly influence your net wage and taxation.

Adjustments to Basic Allowance for Low Income Earners
The most obvious change is in the kind of a higher Grundfreibetrag (basic tax-free allowance). From January 2025, the amount of yearly income that is tax-free will be €12,084, that is €300 more than in the previous year. This change will especially favour those earning little income and those who work part time.

Twelve months forward, the adjustment begins the retroactive increase for the year 2024, when the limit will be raised to €11,784 from the proposed €11,604. This means that for your 2024 tax filing, you’ll get to enjoy this more generous allowance already.

A Consideration of the Inflation Adjustment Middle-Income Earners
If you’re a middle-income earner, there’s good news: currently, the government has intentions of altering income tax measures in regard to inflationary wages. This action taken is to avoid a situation whereby one is locked into a higher tax bracket simply because the inflation rate has gone up and yet one’s purchasing power has not gone up. As for the specific changes, it has not been stated but they will be in accordance with the inflation rates meaning that many a taxpayer will be smiling to the bank.

New Perks for Global Employees
Another interesting change for the expatriates is the new tax rebate system that is actually a three-tier system. International workers coming to Germany could receive a substantial tax break on their pre-tax salary:

• 30% rebate in the first year
• 20% rebate in the second year
• 10% rebate in the third year

It is, however, important to point out that these advantages will only be for specified income levels which have not been discussed. This idea is intended to solve the problem of wage differentials between foreign employees and German citizens that now exceed 13%.

New Significant Features of Marriage
The Ehegattensplitting system which has been in use since 1958 is now set for its most drastic change. At present, many couples have an option to control their tax rates by combining their incomes and splitting them in half, and this system will be gradually abolished by 2030.
However, there will be a new tax class four (factor method) class introduced into the tax system. Under this system, the first filing will be done on individual basis while adjustments will be made later to the correct the balance between the spouses. As the total of such benefits should not significantly differ from those of the current system, new strategy is expected to improve gender equality in income taxation.
The old system of tax classes three and five will be phased out entirely by 2030, changing the taxation of married couples in Germany.

Family Benefits and Child Allowances
Houses with children will benefit from higher tax-free child allowances which will be translated to mean an improvement in child allowances. From 2025:

• The monthly joint income test for parents will rise to €6,672 ($US 60).
• Child benefits (Kindergeld) will rise by €5 per month
• Such further raises are scheduled for 2026, where the limit is set at €6,828

Planning for the Changes

To make the most of these tax changes, consider:

1. Reviewing your tax class if you’re married, especially with the upcoming changes to the splitting system
2. Calculating how the new basic allowance might affect your monthly disposable income
3. Consulting with a tax advisor if you’re an international worker to understand how the new rebate system might benefit you
4. Planning your family finances around the increased child allowances

Implementation Timeline

Remember that while these changes are part of the government’s budget plan, they still need final approval. The ministerial vote is scheduled for July 24, and some adjustments might occur before implementation. It’s advisable to stay informed about any updates or modifications to these proposed changes.

These reforms represent a significant shift in German tax policy, aiming to create a more equitable system while providing additional support to various groups, from low-income earners to international workers and families. While some changes will be immediately noticeable in your paycheck, others will have longer-term implications for financial planning and tax strategy.