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KEY POINTS: Germany’s inflation relief measures to support people in cost of living crisis

The German Bundestag has passed tax relief and other measures to help people deal with rising inflation amid the cost of living crisis. Here's a look at what you need to know.

Shoppers Stralsund, northern Germany, on November 6th.
Shoppers in Stralsund, northern Germany, on November 6th. Photo: picture alliance/dpa | Stefan Sauer

The Inflation Compensation Act, which was passed with a majority in the Bundestag on Thursday, is aimed at offsetting the effects of high inflation on income tax.

The German parliament has also agreed on the largest increase in child benefit in the history of Germany. 

The changes are set to come into force after the Bundesrat – which represents the states – has given its approval.

Here’s a roundup of the planned relief:

Tax system will be adjusted to high inflation

The inflation compensation act, which was put forward by the coalition government of the Social Democrats, Greens and Free Democrats, provides that taxation will be adjusted to inflation, to help around 48 million people in Germany avoid additional burdens.

The law provides for two relief stages in the coming years. 

The total amount of tax relief will be over €12 billion in 2023, going up to around €18 billion in 2024.

It’s aimed at addressing cold progression, which refers to a situation where a pay rise is ‘eaten up’ by inflation. The result is that people have less money at the end of the day, despite getting paid more.

Finance Minister Christian Lindner, of the pro-business FDP, recently argued that if an income of €43,000 has a purchasing power of only €39,000 in the coming year due to inflation, the state should not levy as many taxes as if it were still €43,000 in buying power.

To compensate for this, the government is turning the screws on the income tax scale.

The basic tax-free amount, i.e. the income up to which no tax has to be paid, is to rise – by €561 to €10,908 next year. Furthermore, the top tax rate of 42 percent will not apply until taxable income reaches €62,827 next year. Currently, it’s charged on incomes above €58,597.

In 2024, this benchmark is set to rise to €66,779. The federal government is deliberately not touching the limit for the even higher wealth tax rate of 45 percent because it does not consider any additional relief necessary in this income bracket.

A person in Germany holds cash. The government has pledged to clamp down on gas prices.

A person in Germany holds cash. The government has pledged to clamp down on gas prices. Photo: picture alliance/dpa | Lino Mirgeler

Rise in child benefit

Families can look forward to extra relief from January 2023. Child benefit (Kindergeld) is to be raised to a uniform €250 per month per child, and €275 per month for their third child.

This translates to an increase of €31 a month for the first and second child and €25 per month for the third child. Child benefit for any additional children will remain unchanged at €250 per month. 

Child allowance (Kinderfreibetrag), which guarantees that the parents’ income remains tax-free up to a certain amount, will also be increased, as will the maximum amount of tax-deductible child support, for example for students.

READ ALSO:

The increase in child welfare support is intended to ease the burden on families, as they suffer more from the rising cost of living than households without children, the coalition government said.

One-off payment for gas and district heating

A billion-euro emergency aid grant funded by taxpayers for gas and district heating customers in Germany has also been agreed. 

In December, consumers will have their instalment payments waived for a month.

The one-off relief is meant to bridge the gap until the general gas price cap takes effect – at the latest for consumers in March next year.

READ ALSO: How much could households save with Germany’s gas price cap?

A person turning on their radiator in Germany.

A person turning on their radiator in Germany. Photo: picture alliance/dpa | Bernd Weißbrod

Households and small businesses with an annual consumption of up to 1.5 million kilowatt hours will receive the one-off relief payment.

Certain institutions in the care and education sector and in medical care will also receive the emergency aid – even if their consumption is higher.

The amount of relief is calculated on the basis of one-twelfth of the annual consumption forecast by the supplier in September 2022 and the December gas price.

In this way, the prices, some of which have risen significantly at the end of the year, are to be taken into account.

When it comes to district heating, the amount of the September bill and a “flat-rate adjustment factor” are to be used, which takes into account the price increases up to December.

Tenants are to receive the December relief with their next annual heating bill. Landlords have one year to prepare and submit the statement – but must provide notice of the estimated credit this December.

READ ALSO: When will people in December get their gas bill paid?

Sharing of CO2 costs

The Bundestag also passed a regulation for sharing the costs of the climate levy between tenants and landlords.

Up to now, landlords have been able to pass on the CO2 levy on heating oil and natural gas, which has been payable since the beginning of 2021, in full to tenants.

In future, the additional costs are to be divided between tenants and landlords. Authorities say there will be a graduated model which will encourage tenants to to save energy, and will give landlords an incentive to make structural improvements.

Landlords will bear a higher share (up to 95 percent) of the climate levy the more carbon dioxide emissions their building causes, for example because of an old heating system or poor insulation. If a building is in good energy condition, tenants pay the larger share of the CO2 levy (up to 100 percent).

READ ALSO: German liberals delay plans to cut CO2 for tenants

Reform of housing benefit (Wohngeld)

The Bundestag has also passed a far-reaching reform of housing benefit.

As a result, the benefit will be available to more people from next year and will also be higher: instead of the previous figure of around 600,000 households, around two million households will be entitled to Wohngeld.

The average amount is to rise significantly too – from around €180 to about €370 per month.

Housing benefit will also be restructured. There is to be a permanent heating-cost component, which will be included in the allowance calculation as a supplement to rent. A climate component takes into account rent increases due to energy-efficiency measures.

Furthermore, the general formula for calculating housing benefit will be changed.

READ ALSO: Wohngeld – How people in Germany can get help with rising living costs

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PROPERTY

What to know about mortgages and fees when buying property in Germany

When buying a property in Germany there are a few key differences to other countries regarding mortgages and fees. We asked one expert to walk us through some of what you can expect - especially as a foreigner in Germany.

What to know about mortgages and fees when buying property in Germany

Interest rates might be up on the back of rising inflation, but prices in Germany are down by anywhere between 3 and 10 percent lately, depending on the area and type of property.

According to Peter Kleinwächter, an experienced mortgage broker and senior consultant with MLP Berlin, that may give certain types of buyers a chance to snag a place at a better price. Speaking on The Local’s Germany in Focus podcast, released February 3rd, Kleinwächter said that buyers are in a good position right now, especially if they negotiate directly with a developer.

But they’ll probably have to act quickly, as he expects interest rates to eventually come down and prices to go back up, especially with German governments missing housebuilding targets and a continuing shortage of affordable homes.

The true cost of buying a home in Germany is hidden at first though, with certain processes and fees being applicable that people from abroad may not be used to. In addition, non-citizens may have a harder time getting a mortgage.

READ ALSO: Ask an expert: Is now a good time to buy property in Germany?

Who can get a mortgage?

Legally speaking, there’s no rule on the books saying a non-citizen resident in Germany can’t get a mortgage.

In practice though, many banks will not lend to non-EU citizens who are resident in Germany on temporary visas – even the EU Blue Card for skilled workers. Someone who is an EU citizen typically has no issues with banks based on immigration status at least. In principle, all banks are also open to non-EU citizens who have permanent residency in Germany.

Some banks though, including Kleinwächter’s own, not only work with EU Blue Card holders in Germany, but specialise in those cases.

Houses in Leipzig

Houses in Leipzig, a current “trend city” in Germany. Photo: picture alliance/dpa | Jan Woitas

Kleinwächter’s advice is to not get discouraged if a bank turns you down and to shop around for one that’s familiar in dealing with foreigners. Many conventional banks may have people who speak English, but not to the necessary level. Others simply won’t understand how much the homebuying process in Germany may differ from back home.

“You need someone holding you hand during the whole process, not only the application process when finding the right bank, but also when it comes to applying for the loan because of all the paperwork,” says Kleinwächter.

READ ALSO: What experts say will happen to the German housing market in 2023

How much money do I need set aside?

Kleinwächter says the average deposit required for a mortgage has increased significantly in the last two years, going up around €30,000 to a current average of €150,000 for a typical German property.

Kleinwächter says once you have your deposit together, you can get a loan approval that you can bring with you to home viewings.

“That’s show that you’re serious,” he says.

Once you decide on a place, all German property transactions have to go through a notary, acting as neutral for both parties. Kleinwächter describes this as “when the money counter starts.”

Both buyer and seller will typically sit through a long appointment with the notary while he or she reads out the entire contract and makes sure everyone understands it. Internationals not fluent enough in German to discuss property law may be told to bring along an accredited interpreter. Depending on the length of the appointment, the interpreter’s bill could also run up to several hundred euros.

The notary themselves will set you back up to two percent of the purchase price, with the fee declining the higher the purchase price is and the lower the loan amount.

The fees don’t end there.

You may also have to pay a real estate agent fee – basically the agent’s commission – with the buyer and seller splitting it and shelling out up to 3.57 percent each.

However, there is one way to get by this fee, if you’re willing to buy a new place.

“If you buy something from a developer, you usually don’t have to pay any property agent fee because you’re buying directly from the producer,” says Kleinwächter.

Other types of property, like Kapitalanlagen – or buy-to-let investment properties – usually dispense with this commission, while other real estate agents may have a few commission-free properties on their portfolio to make them more attractive to buyers. 

The land transfer tax though, is not optional.

Paid by the buyer to the federal state government of where the property is located, the applicable federal state government will likely send you a letter soon after you sign the agreement, asking you to pay the tax within a short time. Amounts range from 3.5 percent of the purchase price in Bavaria to 6 percent in Berlin and 6.5 percent in Brandenburg.

Finally, once you take possession of the new property, you will get a letter from your district, asking you to pay a fee to be added to the land register (Grundbuch), proving your right to the property. That fee typically runs several hundred euros.

READ ALSO: EXPLAINED: What you need to know about buying property in Germany

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