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