Read news from:
Austria
SHARE
COPY LINK

PENSIONS

Why nearly 200,000 pensioners in Germany don’t have to pay taxes

Income tax is also due on pensions in Germany. But some pensioners who still had to pay taxes on their last returns are exempt this year. Why is that?

Published: 13 February 2023 15:55 CET
A pile of coins
A pile of coins with the word "pensions" in German behind it. Photo: picture alliance / dpa | Andreas Gebert

Around 195,000 pensioners will no longer have to pay taxes this year, according to a response from the Germany’s Finance Ministry to a question from the Left Party, which was obtained by Redaktionsnetzwerk Deutschland (RND). 

The reason for this is that Germany’s basic tax-free allowance, to which every taxpayer is entitled, increased from €10,347 in 2022 to €10,908 this year.

At the same time, however, 87,000 pensioners will become taxpayers in 2023 as they’re set to receive 3.53 percent (western Germany) or 4.25 percent (east Germany) more pension from July. 

Put together, this means that around 5.9 million pensioners would be liable for taxes in 2023.

Over one million eastern Germans affected

The east German representative of the Left Party in the Bundestag, Sören Pellmann, considered it “good news that more than 100,000 pensioners will be exempt from tax liability this year.” 

But he called pension taxation in general still “a major irritant.”

“More than a million east Germans are affected,” Pellmann said about the region where most Left Party voters are based. For many, he said, the taxation is incomprehensible. 

Germany’s coalition government must “finally consistently protect small and medium-sized pensions from the tax office,” he said. 

“The increase in the basic tax-free amount by 6.3 percent is not enough, if only because of inflation.” 

Pellmann instead called for “a major tax reform for pensioners and an increase in the basic tax-free amount to at least €14,400.”

When you have to pay taxes as a pensioner

To check whether you are liable to pay tax as a pensioner, you need to determine the taxable part of your pension. This depends on the year in which you retire: the later you stop working, the larger the portion of your pension you will have to pay taxes on will be.

If you retire in 2023, you will have a pension allowance of 17 percent; in return, the taxable portion will be 83 percent. You will then not have to pay tax on the amount corresponding to this percentage pension allowance for the rest of your life. 

READ ALSO: Why taxes on pensioners have risen up to 500 percent since 2010

Those who retire in 2040 will then have to pay tax on 100 percent of their pension income. However, the coalition government plans to stretch the period to 2060.

If your taxable portion of pension income exceeds the basic tax-free amount, you will also have to file a tax return as a pensioner.

READ ALSO: Pensions in Germany: How the new government plans to solve an age-old issue

Vocabulary

pensioners – (der) Rentner

basic tax-free allowance – (der) Grundfreibetrag

liable for paying taxes – steuerpflichtig

irritant/annoyance – (das) Ärgernis

We’re aiming to help our readers improve their German by translating vocabulary from some of our news stories. Did you find this article useful? Let us know.

Member comments

Log in here to leave a comment.
Become a Member to leave a comment.
For members

MONEY

How Germany plans to stabilise pension contributions

The German government wants to stabilise pension payments going forward, and slow down the expected increase in pension contributions at the same time. Here's what you need to know.

Published: 5 March 2024 15:49 CET
How Germany plans to stabilise pension contributions

Labour Minister Hubertus Heil (SPD) and Finance Minister Christian Lindner (FDP) presented a reform package on Tuesday that is intended to guarantee a pension level of 48 percent for the future — meaning that pensions would equate 48 percent of your average salary over the course of your working time.

Because this costs more money, but pension contributions should not rise too much, additional financing is needed from another source, they said.

READ ALSO: Six things to know about Germany’s new pension reforms

What’s the proposed pension plan?

The German government is to invest billions in the capital market and pay annual subsidies to the pension insurance from the interest earned starting in the mid-2030s, FDP leader Lindner announced. In addition to the contributions and subsidies from the federal budget, the pension insurance scheme thus receives a third source of funding.

According to the draft law, however, this will not be quite enough to prevent an increase in contributions. The German government expects that the pension contribution will nevertheless rise from the current 18.6 percent to 22.3 percent in the next few years due to the aging population. Without investing in the capital market, however, it would even rise to 22.7 percent in 2045.

The plan is for the federal government to build up a capital stock of €200 billion by the mid-2030s, primarily through loans and transferred assets. From the income on the stock market, €10 billion are then to flow annually into the statutory pension insurance.

“This is not the only solution to the challenge of long-term pension financing,” Lindner stressed. But it is a building block that makes a difference.

“For more than a century, the opportunities offered by the capital market in statutory pension insurance have been neglected,” he said. “Now we’re using it.”

Heil and Lindner emphasised that it was not about gambling and short-term speculation. “This is money well spent in the long term,” said the Minister of Labour. It is also not a question of investing citizens’ contributions in shares, but only money from the state.

Why Germany needs to protect the pension level

All people must be able to rely on the statutory pension, Heil stressed. Without the reform, pension levels would very soon decouple from wage developments. This means that pensioners are becoming poorer than the working population.

“We will prevent this by safeguarding the pension level,” Heil stressed. The pension level indicates what percentage of the current average salary someone receives as a pension who has always worked at the average wage and paid contributions for exactly 45 years. When pension levels fall, pensions rise less than wages.

Heil promised: “There will be no reduction in pensions and no further increase in the retirement age.” The statutory pension remains at the heart of old-age provision. For many pensioners, this is the main income and must therefore remain stable.

If Heil and Lindner have their way, the reform package should be adopted by the Bundestag before the parliamentary summer recess in July.

READ ALSO: How does Germany’s retirement age compare to the rest of Europe’s?

SHOW COMMENTS