In its budget talks, the Federal Government agreed to provide further relief for citizens. To this end, the Federal Cabinet has adopted the Tax Reform Act that will ensure higher net pay for employees from 2025 onwards, also including improvements for businesses and non-profit organisations.

What does this mean in real terms?

• The basic personal income tax allowance and child tax allowance will be raised considerably for 2025 and 2026. The income tax allowance, which is the income for which no income tax is charged, is to be raised to EUR 12,084 in 2025 and then to EUR 12,336 in 2026. This amount will remain tax-free as it is considered the living wage for an adult. At the same time, the child tax allowance will also be raised: to EUR 9,600 in 2025 and then to EUR 9,756 in 2026.
• The tax exemption limits for the solidarity tax will also be raised in 2025 and 2026 and the income tax rate will be further adjusted to inflation, with an exception applying to the so-called rich people's tax. This means that no additional tax is to be charged on wages and salaries if increases simply compensate for higher prices.
• There will be tangible improvements to benefits for children, teenagers and families. The child benefit will go up by five euros per month to EUR 255 in 2025 and up by another four euros to EUR 259 in 2026.
• The immediate monthly supplement for low-income families and those affected by poverty is going up by five euros in 2025 to EUR 25 per month.

What’s more, the basic personal income tax allowance and child tax allowance are going to be further raised retroactively for this year, too. Following this adjustment, the basic tax allowance for 2024 will be EUR 11,784 and the child tax allowance EUR 9,540. This adjustment ensures that the subsistence minimum for children and adults remains tax free in 2024. The Bundestag and Bundesrat have already agreed to this arrangement.

What else is changing?

• Tax incentives for companies are provided in the form of improved options for offsetting items against taxable income and an increase in research funding. These measures that are part of the agreed growth initiative are designed to encourage private companies to invest and to make Germany a more attractive business location.
• Further key adjustments apply for tax-privileged non-profit organisations that will be able to occasionally comment on current affairs beyond their purpose in future without losing their tax-privileged status. This means, for example, that a sports club will be able to take a stance against racism in connection with current events. In addition to this, non-profit organisations will have more time to use allocated funds and will be granted greater flexibility if they are acquiring or operating photovoltaics systems.
• An important point of the coalition agreement is also being implemented: tax classes III and V will be replaced with a joint income taxation arrangement for tax class IV.
  
  Please note: The reform provides for the income tax splitting procedure for spouses and life partners to remain in place and be applied in a modernised way in the future. The joint income taxation arrangement allows for the tax-reducing “splitting tariff” for spouses to be individually applied to monthly income tax payments. Planning provides for the procedure to apply from 2030 onwards. This means that tax classes III and V will then no longer be used for tax deductions. Further information about the tax class reform is available from the Federal Ministry of Finance.