Income tax in Germany
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In this article, we tell you what income tax is set in Germany for individuals and how many payroll taxes are paid in Germany.
German citizens and foreigners who live in Germany as residents of the country pay income tax on German and foreign income. There are two types of income tax in Germany: Lohnsteuer and Einkommensteuer. Lohnsteuer applies to employees and wage earners. The Einkommensteuer applies to self-employed people, freelancers, lawyers, tax consultants and doctors who have their own practice.
Tax class, tax deductions, social security contributions, solidarity surcharge and church tax are taken into account when calculating the tax amount. Totals may be adjusted at the end of the year in case of underpayment or overpayment of taxes.
Income tax in Germany
A German tax resident pays income tax on all income, no matter in which country it is earned. A foreigner who has a residence permit and lives more than 183 days a year in Germany automatically becomes a tax resident of the country. Non-residents pay tax only on income earned in Germany.
Tax returns for employees are sent to the tax service by the employer. Other taxpayers file their returns online themselves.
When filing a tax return is mandatory:
- Self-employment;
- Income received from abroad;
- Divorce, provided the taxpayer or former spouse remarried the same year;
- A social security benefit has been received: maternity, child support or unemployment;
- To apply for tax deductions;
- The tax service has sent a letter requesting a return.
In Germany, taxpayers file a tax return annually with their local tax office. You can find out to which branch of the tax office you have to submit your tax information by contacting the municipality where you are registered.
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Total area 310 m² Land area: 1,390 m²
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Total area 101 m² 2 bedrooms
What income is not taxable
German tax residents pay no income tax on that part of their income that does not exceed the non-taxable minimum of €9,744 per year for a single person and €18,816 per year for a married couple (for 2021). Anything above this amount is subject to income tax.
What is subject to income tax
- Employment;
- Investments and savings;
- Business and self-employment;
- Selling or renting real estate;
- License fees;
- Private transactions, alimony or annuities;
- Benefits and gratuities.
Dividends received from anywhere in the world are subject to German income tax at 25% plus a solidarity surcharge of 5.5%. The standard tax deduction for residents is €800 per year for single payers and €1,600 per year for married couples.
Income from rental property is subject to income tax unless otherwise provided for in a double taxation treaty. A solidarity surcharge of 5.5% of the rent is also added to income tax.
Capital gains tax is payable on the sale of property that has been owned for less than 10 years.
Income that is not taxable but is used to determine the tax rate:
- Unemployment benefits;
- Maternity and childbirth benefits;
- Income taxable in another country under a double taxation treaty.
Payroll taxes in Germany
The employment agreement signed between the company and the employee determines a gross salary (Brutto), before taxes and levies. There will be a deduction from this salary of taxes and social levies, which are fairly high in Germany, as well as in other Western European countries. This is especially noticeable with the progressive taxation system used in the country. After all the deductions, the net wages (Netto), that is the money the employee receives to their bank account, will be markedly less than the amount specified in the employment contract.
Payroll taxes and levies in Germany
Income tax (Einkommensteuer / Lohnsteuer) on wages in Germany ranges from 14 to 45%. However, tax is only paid on the amount that exceeds the non-taxable minimum of €9,744 per year for a single person or €18,816 per year for a married couple.
Solidarity tax (Solidaritätszuschlag) is 5.5% of the income tax. Under the new rules, this tax is paid only by persons with high income. Since 2021, the national government has abolished the solidarity surcharge for almost 90% of salaried employees. The tax was introduced after German unification in 1990 to support the new, less developed federal states.
Church tax (Kirchensteuer) is paid by those taxpayers who are members of a church. In Bavaria and Baden-Württemberg the tax rate is 8% of the income tax, in the other federal states it is 9%. This tax can be waived by leaving the church.
Health insurance constitutes 14.6%. 7.3% is deducted from the employee's salary for these purposes, and another 7.3% is paid by the employer.
Pension insurance constitutes 18.6%. This social tax is also divided in half, with the employee paying 9.3% of his salary and the employer paying another 9.3%.
Unemployment insurance constitutes 2.4%. The employee and the employer each pay 1.2%. Civil servants and the military are exempt from this charge.
Long-term care insurance constitutes 3%. The insurance is paid in half by the employee and the employer at 1.5%. If the employee is over 23 years of age and has no children, he pays an additional fee of 0.25%. The Pflegeversicherung policy must be taken out by all people living permanently in Germany. This insurance includes the payment for staying in a nursing home.
Contributions to these four German social funds together amount to about 20% deducted from the employee's salary.
Income tax scale in Germany
Germany uses a progressive income tax scale. This means that the more a person earns, the higher the tax rate they pay. The tax rate varies depending on the level of income from 14% to 45%. However, the maximum rates do not apply to the entire amount earned in a year, but to the difference between the amounts taxed at the lower rate and the higher rate.
Income tax scale for residents in Germany
Taxable income, € per year | Tax rate, % |
|---|---|
Less than 9,744 | 0 |
From 9,744 to 14,754 | 14–24 |
From 14,754 to 57,919 | 24–42 |
From 57,919 to 274,613 | 42 |
More than 274 613 | 45 |
There are several tax classes in Germany, which are mainly determined by the marital status of the taxpayer. So the size of the tax base depends on the class.
Tax classes in Germany
Tax class | Description |
|---|---|
Class 1 (Lohnsteuerklasse I) | Single, widowed, divorced or in the process of divorce and lives separately, spouse living in another country, and by default during the first year of employment in Germany. |
Class 2 (Lohnsteuerklasse II) | A single parent living with a child |
Class 3 (Lohnsteuerklasse III) | Spouse with low income or unemployed |
Class 4 (Lohnsteuerklasse IV) | Spouses with equal income |
Class 5 (Lohnsteuerklasse V) | One spouse is classified under tax class 3 |
Class 6 (Lohnsteuerklasse VI) | The payer has a second job or a tax credit. |
The income of spouses is better assessed jointly for tax purposes. Thus, spouses with unequal income in Class 3 or Class 5 can save on total taxes.
Payroll income tax in Germany: payment deadlines
Tax returns are paid after the end of the tax year. And the tax year coincides with the calendar year. The return is usually sent to the client by December 31 and is due by July 31. Thus, you should report for the year 2020 by July 31, 2021.
Two to six months after receipt of the tax return, the tax service will send you a notice containing the tax assessment. The tax assessment notice has information about the tax deductions that will be made to the applicant's account. It will also inform you about the additional fees to be paid within four weeks.
You can fill in your tax return on paper or online at the website of the German Federal Central Tax Office. All taxpayers fill in a general tax form (Mantelbogen). Depending on the case, it may also be necessary to fill out additional forms.
Tax deductions
Spouses raising children can claim a special tax deduction of €8,388 per child (for 2021). If the child's parents do not live together or are divorced, each can get half of this amount. The state also pays child benefits.
It is also possible to claim a tax deduction for education. If the child attends a private German school, the deduction will be 30% of the tuition fee.
You can also get a tax deduction for up to €1,000 for work-related expenses that have not been reimbursed by your employer:
- Moving to another apartment because of work;
- Travelling long distances to work;
- Training and professional equipment;
- Maintaining two houses if you have to work in another city and rent another apartment.
Deductions are also made for insurance premiums, including health insurance, pension and unemployment contributions.
Penalty for late payment of tax
If you do not file a tax return on time, you will have to pay a penalty for late registration. The taxpayer is penalized for each month of delay by 0.25% of the accrued tax. So, for a total tax of €10,000, you have to pay €25 per month.
If you delay paying tax, you will have to pay a higher penalty – 1% of the unpaid amount for each month during which there was no payment.
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