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TAXES

EXPLAINED: The German tax changes coming into effect in April 2023

April 1st will see many of the recent changes to Germany’s tax regime implemented. Although passed through the Bundestag last year and technically effective as of January 1st, April is the first month many of the changes will be evident on employee payslips. We explain what might look different.

Published: 30 March 2023 08:02 CEST
Updated: 1 April 2023 05:53 CEST
Tax return 2021
A worker does their German tax return at home. Photo: picture alliance/dpa/BCD Travel | BCD Travel Germany GmbH

Employees working in Germany should finally see some changes on their payslips in a month from now, as tax law amendments passed last year finally leave some extra money in their bank accounts at the end of each month.

The most important changes concern tax credits or allowances—and many don’t have to be applied for.

Employees will generally see the new allowances automatically calculated into their monthly payslips.

Freelancers will have to use these new numbers when filing their 2023 tax returns after the end of the year. Here are the most important changes:

Basic tax-free allowance increases

The Grundfreibetrag – or “basic allowance” – is the amount of money you get to make a year before being subject to any German tax. In 2022, the first €9,984 a person made in Germany was subject to no tax at all, with any money made on top of that being taxable. As of April 2023, that number is increasing by quite a bit, to €10,908 annually. Employees should see this extra money prorated by month starting with their April 2023 payslip.

READ ALSO: EXPLAINED: How to understand your German payslip

Higher income threshold before entering top tax rates

Before April 1st, earning €58,597 annually put you into the highest possible income tax bracket in Germany. Any earnings above this were subject to the top tax rate of 42 percent.

As of April 1st, the amount someone has to earn before paying the top tax rate of 42 percent goes up by several thousand euros to €62,810 per year, meaning a little bit extra stays in the accounts for anyone earning less than this. There is still a special tax bracket above this for wealthy people. That threshold starts at earnings of €277,826 annually and will remain the same, with people making at least this amount subject to a top tax rate of 45 percent.

READ ALSO: Reader question: How do I find a German tax advisor?

Employee lump sum tax credit to go up

Although freelancers can deduct almost anything associated with their work on their annual tax returns—from stationary to computer and phone purchases—German tax offices also generally assume that employees have certain expenses related to their work that they may pay out of their own pockets.

These could be phones or LinkedIn subscriptions for example. Crucially, the tax office simply gives an amount to each employee in tax credits—without them having to prove the expense through receipts.

The tax office is now hiking this allowance to  €1,230 per year as of April 1st, and this should be reflected on the April 2023 payslips for employees.

READ ALSO: EXPLAINED: Which German benefits are increasing in 2023 – and how do I claim them?

Tax allowance for single parents to go up

Single parents specifically will have an additional tax-free allowance they get to keep, now set to go up with the April payslip to €4,260 annually, assuming they have one child. If they have more than one child, their allowance will increase by another €240 per year, per child—on top of the base amount.

READ ALSO: What benefits are you entitled to if you have children in Germany?

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TAXES

EXPLAINED: The top tax deductions often overlooked by employees in Germany

Employees in Germany aren't required to file an income tax return - but it's recommended they do as the average filer gets €1,000 back. Here are our top tips to get the most bang for your euro.

Published: 6 June 2023 09:24 CEST
Updated: 6 June 2023 15:25 CEST
EXPLAINED: The top tax deductions often overlooked by employees in Germany

Employees in Germany pay income tax every month – without having to pay it themselves. That’s because employers automatically deduct the monthly amount that their Mitarbeiter (employees) owe straight from their paycheck.

However, the Arbeitgeber (employer) doesn’t usually take the employees’ daily tax-deductible expenses  – ranging from transport to childcare – into account.

It is therefore all the more important for employees to take stock after the end of a year with their tax return and to let the Steueramt (tax office) know which tax deductible expenses have been incurred. 

Note that any employee with extra income – for example renting out a property – always has to file taxes by the yearly deadline. But employees who just receive income from their employer have up to four years after this deadline to claim back expenses.

READ ALSO: What you need to know about Germany’s extended tax filing deadlines

Married couples/domestic partners 

Those who marry or register a civil partnership can benefit from the so-called Ehegattensplitting (spousal splitting) for the first time in that same tax year. In most cases, this reduces the tax burden, according to Germany’s Taxpayers’ Association.

Partners file a joint tax return and choose a joint assessment. The tax office adds the partners’ incomes to a total income and divides it by two. Half of the total income is then used to calculate the tax burden, which is then simply doubled. 

The greater the difference in income between the partners, the more likely it is that joint assessment is worthwhile, Florian Machnow of the tax start-up Taxfix told broadcaster NDR. If both earn the same amount, however, the tax burden does not change.

Taking up a job during the year

Whether unemployed, on sabbatical or entering the workforce for the first time, for example after graduation from uni: those who were only employed for part of the year can most often count on a sizable tax refund.

The reason for this, according to the Taxpayers’ Association, is that the monthly payment of wages is based on the assumption that those wages will be paid for the entire year – and the tax paid is correspondingly high. 

However, if you only receive a salary for part of the year, you will have a much lower annual income – and thus a lower tax burden than assumed by an employer.

German Elster tax platform

The German Elster tax platform. Photo: picture alliance/dpa/dpa-tmn | Christin Klose

Expenses for childcare

If you have children, you can deduct childcare costs – such as Kita (daycare) fees or school fees – from your tax return. As Munich-based expat tax advisor Thomas Zitzelsberger previously told The Local, two-thirds of the costs can be deducted as special expenses, up to a maximum of €4,000 per child.

READ ALSO: EXPLAINED: The tax cuts foreign parents in Germany need to know about

Long journeys to work

Taxpayers who have to travel long distances to work can claim these for tax purposes. For the first 20 kilometres, 30 cents each can be claimed as a lump sum. From the 21st kilometre onwards, they can even get 38 cents each – regardless of whether you travel by bike, car or train.

High expenses for professional activity

The Taxpayers’ Association (Bund der Steuerzahler) advises that anyone who makes expensive purchases for job-related reasons, or attends training courses that are not paid for by their employer, can deduct the expenses as income-related expenses. 

Working in a ‘home office’ can also increase income-related expenses. For each day of working from home, taxpayers can deduct a lump sum of €6.

READ ALSO: Germany to extend (and increase) tax rebate of people working from home

High ‘special payment’ (Sonderzahlung)

Whether it is a bonus for good work or severance pay for the early termination of an employment contract: one-off special payments can lead to a particularly high amount of income tax to be deducted by the employer – and often too much. If you file a tax return, you can get back the extra tax you paid on them.

Job-related move

Moving house for a new job? If you start a new position in another city, or return to a job after a posting abroad, you can include the costs of the move in your tax return.

But it’s not just the relocation itself that needs to be taken into account. You can also deduct travel expenses incurred in order to view flats, pay estate agents or even make double rent payments. Just make sure you document all of the costs.  

Costs directly related to the move, such as the renovation of the old flat, re-registration and the professional installation of lamps, can also be taken into account with the so-called flat rate for moving costs, wrote the advice portal “Finanztip”. Taxpayers can deduct up to €886 in their tax return – and if a spouse or partner, unmarried children, stepchildren or foster children also move, there is an additional €590 per person on top.

A piggy bank

A German piggy bank with euro notes. Photo: picture alliance/dpa/dpa-Zentralbild | Patrick Pleul

Paid church tax

“Anyone who is a member of a church in Germany has to pay up to nine percent church tax,” said Machnow from Taxfix. “The good thing is that it can be deducted.” 

For tax purposes, church tax is treated just like a donation and entered under special expenses. 

Energy relief payment not received

Taxpayers who did not receive the energy relief payment of €300 in to help with energy expenses in 2022 can get the money via the tax return. 

The tax office will automatically take the lump sum into account when it is submitted.

READ ALSO: What you need to know about Germany’s €300 energy relief payment 

High extraordinary burdens due to illness

Whether medical expenses, expenses for prescription drugs or the required wheelchair: “If taxpayers have incurred a particularly large amount of expenses for their own medical costs in one year, this can have a tax-reducing effect,” said the Taxpayers’ Association. The costs are entered under extraordinary burdens.

The prerequisite is that medical expenses exceed the reasonable burden limit. This depends on income, marital status and the number of children.

Capital gains

Have you sold any securities at a profit this tax year and received dividends? Then you could be eligible for a tax refund. If a taxpayer has paid 25 percent final withholding tax on capital gains, although their marginal tax rate is below 25 percent, he or she can have the difference refunded by the Steueramt.

According to the Taxpayers’ Association, this mainly affects low-income earners, pensioners and students.

Craftsmen’s services or energy-efficient building renovations

If craftsmen carry out work within your own four walls, it can be expensive at first. But the expenses can reduce the tax burden, wrote Finanztip. Twenty percent of the labour costs, but no more than €1,200, can be deducted. To do this, the total invoice amount needs to be entered in the annex “Household-related services”.

According to Finanztip, the tax savings can be significantly higher if the owner-occupied property is renovated. In this case, too, 20 percent of the costs can be deducted, up to a maximum of €40,000. For this purpose, the annex “Energy measures” (Energetische Maßnahmen) has to be filled out on your tax return. The prerequisite is, for example, that no state subsidy was claimed in order to carry out the work.

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