Europe's news in English

COPY LINK

INCOME

Middle-income earners to keep hundreds of euros under proposed tax plan

If the Social Democrats (SPD) eventually agree to join another coalition with Angela Merkel, middle income earners will feel the benefit in their pockets, the Frankfurter Allgemeine Zeitung (FAZ) reports.

Published: 17 January 2018 10:10 CET

Middle-income earners to keep hundreds of euros under proposed tax plan

Photo: DPA

Under the terms of the proposed coalition deal, a singleton on €40,000 a year will be paying €600 less in tax by 2021, FAZ reported on Wednesday based on calculations by the Taxpayers’ Association.

The SPD leadership agreed on the proposed deal with Merkel’s Christian Union after five days of talks earlier this month. But the centre-left party must now convince their membership to back the deal.

Overall, the coalition deal offers tax relief across the pay spectrum. A single-income family with two children on a salary of €40,000, for instance, can expect to have €860 more at their disposal by 2021.

The savings will come in different ways depending on people’s familial situation. Unmarried people without children will feel the benefit mainly through the abolishment of the Solidarity Tax for low and middle income earners.

The tax was introduced after reunification to pay for the rebuilding of eastern Germany. But, with the eastern states having made progress in modernizing infrastructure, conservative parties have for several years wanted to phase it out. People who earn over €54,000 will continue to pay the tax.

Singletons will also feel the benefit of a change in the way social security contributions will be distributed. Someone on a €25,000 salary will save €163 in this way.

Families – already exempt from paying the Solidarity Tax – will benefit mainly from an increase in child support payments, which are set to increase by €25 a month.

Research by the OECD last year showed that Germany has the second highest tax burden worldwide after Belgium.

The OECD calculated each country's tax wedge – the gap between what employers take home in pay and what it costs to employ them, including personal income tax and social security contributions.

Germany had a tax wedge for single, childless workers of 49.4 percent, behind Belgium at 54 percent. That means nearly half of a single person's income currently goes towards taxes and social security contributions in Germany.

EXPLAINED: How do you close down a freelance business in Germany?

Striking out on your own as self-employed is one of the scariest – and potentially most rewarding things – you can do. In Germany, it also comes with its own set of rules around tax and social insurance.

But there are times when – for whatever reason – it may be time to move on.

Whether it’s because you have an exciting new opportunity or things haven’t quite worked out the way you hoped due to economic pressures – winding down self-employment the right way is crucial to avoid gaps in your health and social insurance coverage in Germany.

The steps you have to take are also a bit different depending on if you are new self-employed (Freiberufler) or have a trade licence (Gewerbe) – with some steps not being necessary for new self-employed.

Trade licences are automatically cancelled if the licenced person dies or the company ceases to have financial assets.

Resigning the trade licence or declaring it dormant

New self-employed people like writers or speakers don’t need to go through this step, as they don’t need a trade licence.

Those who have a trade licence will need to contact their competent local authority and resign it, or declare it dormant (withdrawing the licence). If you’re only winding down temporarily, declaring your trade licence dormant instead of de-registering completely may save you a few headaches later.

You may have to do this in person at your local trade office – or Gewerbeamt – depending on whether your local authority allows online de-registration or not. You’ll need to bring your official ID, trade licence, confirmation of registration and possibly an extract from the trade register. Fees are dependent on your local authority and can range from being free to €25.

You can declare the date you intend to resign the licence – which can be in the future. To ensure no gaps in your social insurance protections, including health insurance, set this date for the day before whatever comes next. For example, if you’re starting a new job on January 1st set the date for your trade licence to expire as December 31st.

The trade office will typically notify your local tax office, so you won’t need to do this yourself.

Notifying your tax office

If you’ve had to resign your trade licence, you can skip this step as your trade office will do it for you. If you’re a Freiberufler without a trade licence you need to resign, you’ll have to notify your local Finanzamt, or tax office, yourself.

Luckily, this is a pretty easy step.

First, you need to decide whether you’re ceasing operations completely or wanting to continue them part-time. If you’re ceasing completely, you’ll end up surrendering your self-employed tax number.

You don’t have to do this though. If you think you may still carry on some self-employed business as a side gig, you can inform the tax office that you intend to do so and keep your number.

At that point, the tax office should treat you as a Kleinunternehmer – or a small business making less than €22,000 a year. Having this status means that you will not need to pre-pay taxes or charge VAT on your invoices for freelance side projects.

If you derive any income from your side gig in the future though, you’ll still have to file a tax return.

READ ALSO: Can I have a freelance side gig as an employee in Germany?

Notifying your health insurance

While different private plans in Germany may have different notification requirements, if you have public health insurance in Germany, you should notify them that you’re winding up your self-employed business. Specifically, advise them exactly what date you’re wrapping up.

Again, this should be right before you start your new job or leave the country, to ensure no gaps in your coverage.

If ending your self-employment in Germany, take care to ensure that there’s no gaps in your health insurance coverage, by giving the right date for when you’re ceasing activity. You don’t want to be caught without coverage. Photo by Stephen Andrews on Unsplash

If you are in an artistic profession and thus pay pension, health, and nursing insurance through the Artist Social Insurance Fund (KSK), you should also advise them as well. If you’re leaving self-employment completely, you can typically give notice to KSK as to when it’s ending.

If you’re not, and intend to still make money freelancing as a side gig, they should know this as well. In this event, you’ll no longer pay health or care insurance through KSK, as this is covered through your main job.

You may need to continue to pay pension contributions through KSK based on the amount of money you still make from self-employed activities — depending on how much of them you continue.

KSK: How creative freelancers can pay less for German health insurance

Url copied to clipboard!