Federal Tax Authority reveals plans to combat cold tax progression
Raising tax free base
Constitutionally, the subsistence level of citizens cannot be taxed. According to plans now revealed by the Federal Tax Authority, the tax-free base amount for income tax purposes is set to rise with an increase to 10,632 Euro in 2023, and to 10,932 Euro in 2024, respectively, leaving this amount untaxed in Germany.
In addition, a downward shift in the tax rate is intended to combat the sharp rise in cold tax progression resulting from inflation and reduce the tax burden for everyone from next year. Otherwise, benefits received to offset the rising cost of living would end up being taxed at a higher rate. Without this measure, a vicious circle could have developed, leading to even higher salaries being negotiated, which would have further fueled inflation. This relates to all salary components subject to the tax tariff, and extends across the entire scale up to the top earners' tax rate.
The top income tax rate will start at 63,514 Euro from 2024, instead of currently 58,597 Euro. The wealth tax surplus is excluded from the adjustment of the income tax tariff. The additional 3% wealth tax rate will be levied from an unchanged level of income of 277,826 Euro (for single filers).
Introducing the 3rd German Relief Package
Up to 3,000 Euro tax free bonuses for employees
Among the plans now introduced by policymakers are employer-paid bonuses on a voluntary basis which are exempted from wage taxation and social security contribution. The stimulus on the employer side is the comparably low cost in giving employees a pay raise, as the employer pays up to 21% additional social security overhead exepenses on the average employee's gross salary.
Bonuses must be paid additionally by employers, and not in replacement of (annually) recurring salaries. A review of the job offer letter can help adapt compensation to secure the bonuses stay exempt from tax and social security levies. We may assist in conducting this review. Please inquire with us for details.
Broadening beneficiaries of the Energy Relief Pay
Retirees were previously not qualified beneficiaries for receiving the 300 Euro Energy Relief Pay. This policy was widely criticized, and now reversed. Additionally, students will receive a one-time energy relief pay of 200 Euro.
Adjustments to social welfare benefits
Among the many adjustments decided, it's noteworthy that parents will receive higher child support (Kindergeld), which is set to rise by at least 18 Euro. Further measures relate to receivers of social welfare benefits, who will be additionally supported with housing and heating allowances to combat inflation.