The changes are part of Finance Minister Christian Lindner’s (FDP) second annual tax law, a wide-ranging package of tax reforms that will now move to the Bundestag for approval.

The reforms are intended to adapt Germany’s tax system to the current high cost of living and address some inequalities in how couples are taxed. 

“It is simply a matter of fairness to adjust the tax system to inflation,” Lindner said at a press conference when introducing the proposals in June. “The state must not be the winner when there’s high inflation.” 

One of the cornerstones of the reform is the increase in the tax-free allowance – the amount employees can earn without being subject to taxation. 

This amount will increase by €180 to €11,784 this year and rise incrementally to hit €12,336 by 2026.  

The child tax-free allowance will also see gradual increases over this period, starting with €228 extra this year and rising to €6,828 by 2026, while the child benefit (Kindergeld) will also go up by €5 per month from 2025. 

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Lindner has also set out plans to combat ‘cold progression’: a phenomenon whereby an increase in earnings is eaten up by inflation but taxed at a higher rate regardless. This means the income threshold for each tax bracket will be pushed upwards next year, with the exception of the highest tax rate. 

The top tax rate of 45 percent will still apply to incomes above €227,826, but the thresholds for the solidarity surcharge will be raised.

Though Lindner managed to pass his reforms in cabinet on Wednesday, his centre-left coalition partners from the Social Democrats (SPD) and Greens have previously aired their scepticism about the reforms.

“You can’t demand drastic savings from other departments…and then demand tens of billions yourself without need,” Green Party finance expert Katharina Beck recently told Reuters, referring to recent budget cuts for departments like defence and infrastructure.

Describing the plans as “dubious”, Beck argued that they would primarily benefit the well-off. 

Changes for couples

A cornerstone of the reforms includes removing a loophole often used by couples with differing incomes to reduce their taxes. 

The current tax classes 3 and 5, which come with higher tax-free allowances and higher deductions respectively, are set to be abolished by 2030. Instead, couples will automatically be placed in tax class 4.

This change aims to distribute the tax burden more equitably between partners, reducing the need for end-of-year tax payments and addressing the perception that lower-earning partners’ work is undervalued.

However, the reform stops short of scrapping the marriage splitting system – known as Ehegattensplitting in Germany – which benefits couples with disparate incomes by combining their earnings for tax purposes.

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While many in the traffic-light coalition have spoken out against Ehegattensplitting, the FDP opposes its abolition, equating it with a significant tax increase for couples.

However, critics say the shared taxation helps perpetuate income disparity and part-time work among women.