The German federal government is planning a series of new policies on taxation that would provide tax relief to the tune of 42,5 billion euros by the end of 2024 - by, among other things, raising tax-free allowances and increasing child benefits. 

German government planning 42,5 billion euros in tax relief

The German federal government is investing trillions of euros in the fight against the economic consequences of the coronavirus crisis. Accordingly, with the draft law “For Tax Relief for Families and for the Adjustment of Further Tax Regulations”, Federal Finance Minister Olaf Scholz wants to relieve the financial burden on people who pay taxes in Germany. 

In its current form, the draft law provides for a total tax relief of 42,5 billion euros by 2024: 7 billion euros in 2021 and then between 11 and 12 billion euros each year in 2022, 2023 and 2024. 

Tax-free allowance increases on January 1, 2021

The tax relief will be provided in a few different ways. The first is by increasing the tax-free allowance. The federal government is apparently planning on increasing the threshold to 9.696 euros in 2021 - meaning anyone who earns less than that in a year does not pay any income tax. The tax-free allowance is currently 9.408 euros, meaning that taxpayers can look forward to a boost of almost 3,1 percent. This tax-free allowance is adjusted annually.

Those on high salaries also look set to benefit, because the top tax rate of 42 percent (plus solidarity surcharge) will only apply to annual incomes of 57.919 euros or more. The current threshold is 57.052. 

German government to tackle cold progression

The federal government also plans to tackle so-called cold progression, which is what tax experts call it when a wage increase, that only compensates for inflation, leads to a higher tax burden. In future, according to the Handelsblatt, the government wants to adjust income limits for certain tax rates in line with inflation. 

If you add up all these planned tax breaks, therefore, millions of people in Germany look set to receive a significantly higher net income in 2021 than they did this year. However, it’s also worth noting that contribution rates to social security are expected to increase in 2021 as well, which may cut into any saving made. 

Child benefit to increase from 2021

At the same time, families in Germany will benefit from a higher net income, because the federal government wants to increase child benefits by a further 15 euros from January 1, 2021. That would mean that parents will receive 219 euros per month per child for the first and second children, and more for the third and subsequent children. 

Parents with higher incomes typically use the child (tax-free) allowance instead of the child benefit, because it brings a higher financial benefit. These parents will also benefit, since Scholz is planning an increase to the child allowance in 2021 as well. 

The cabinet wants to pass the law on tax relief measures by July 29.