For members


Kurzarbeit: Everything you need to know about paying taxes on reduced working hours

Like most bureaucratic aspects of life in Germany, paying taxes on reduced working hours is a bit complicated. We break down how you can save money.

Kurzarbeit: Everything you need to know about paying taxes on reduced working hours
Photo: DPA

What is Kurzarbeit’?

Kurzarbeit, directly translated as ‘short work’, is far from a new idea in Germany – it became fully established in 1924 as a response to the economic crisis of the Weimar Republic. But it has risen to a new level of prominence during the Covid-19 pandemic.

Essentially, in order to deal with rising unemployment, company employees are put on reduced hours.

The federal government then steps in to pay around 60 percent of their salary for a set period of time – normally a year.

This payment is known as ‘Kurzarbeitergeld’ (short-time worker payment) and is paid directly into your bank account.

In 2020, 16 percent of the German workforce were on ‘Kurzarbeit’ as a result of the pandemic – that’s around 7.3 million people.

READ ALSO: EXPLAINED: What you need to know about Germany’s ‘Kurzarbeit’ job support scheme?

Will I have to pay tax on the Kurzarbeit money I receive?

Anyone who receives a Kurzarbeit allowance is required to file a tax return. The allowance itself, though, is paid tax-free.

This means that it is lower than the gross salary, but because taxes and social security contributions are no longer deducted, the difference to the usual net salary is not that great.

However, the Kurzbeit allowance is also subject to a Progressionsvorbehalt, or progression clause. If it sounds complicated, that’s because it is. 

Jana Bauer from the Federal Association of Wage Tax Assistance Associations, explained it this way to Spiegel: 

“When you file your tax return for the previous year, the first thing that is determined is how high your taxable income is and the tax to be assessed on it.” 

In Germany, there is a tax progression, which means that those who earn more also get a higher percentage deducted from their income as tax – at least within a certain range. 

“To determine the tax rate, not only the total income is considered, i.e. not only the taxable portion from gross wages, for example, but also wage replacement benefits, such as unemployment benefits, parental benefits or maternity benefits,” Bauer said. 

In other words, these benefits by themselves are tax-free but factored into the overall tax class.

And so Kurzarbeit allowance, which is a classic wage replacement benefit, also has an effect on the tax progression.

Photo: DPA

This can play a role, for example, if you receive your salary for half a month and Kurzarbeit allowance for the other two weeks. As the salary is only half as high for half the month, a much lower tax is deducted directly from the salary in the monthly payroll. 

How Kurzarbeit affects the tax rate

However, the Kurzarbeit allowance you receive for the second half of the month raises the tax rate. Then, because of the higher rate, you have to pay money in arrears when you file your tax return.

This is also the reason why a person is obliged to file a tax return as a recipient of a Kurzarbeit allowance. Single employees who are taxed in tax class 1 are not actually required to file a return. In years with a short-time allowance of more than €410, however, they are.

READ ALSO: Why people on ‘Kurzarbeit’ in Germany need to prepare for a tax surprise

“In practice, most recipients of a Kurzarbeit allowance should be spared an additional payment if they were exclusively on the allowance for a few months and worked full time in other months,” said Bauer.

It is not possible to rule it out across the board, because so many factors play a role in the tax return, such as what is deducted as income-related expenses, household-related expenses or special expenses. 

“But more common will be set-ups in which you still get a refund after the tax return.”

A simple example with round figures illustrates this and shows what difference the type of Kurzarbeit work on its own makes:

A single person without children with tax class I and a gross salary of €2,000 is on 100 percent reduced working hours for six months this year, and is working full-time for the remaining months.

The employee can expect a refund of around €600 after filing his tax return.

This is because with a gross wage of €2,000 over half a year, he would have to pay more than €1,100 in income tax, because the calculation assumes a constant wage for the entire year. If the employee had only 50 percent short-time work, but this over the entire year, on the other hand, he would have to pay around €600 in back taxes.

The reason for this is that if the wage is €1,000, i.e. “half” wage, he pays no wage tax at all.

On the website of the Federal Ministry of Finance, there is a calculator that anyone can use to determine the individual effect of the tax class on their monthly salary.

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For members


Reader question: Can I get a retirement visa for Germany?

Unlike in EU countries such as Portugal or Spain, Germany does not have a visa specifically for pensioners. Yet applying to live in the Bundesrepublik post-retirement is not difficult if you follow these steps.

Reader question: Can I get a retirement visa for Germany?
Two pensioners enjoying a quiet moment in Dresden in August 2020. Photo: picture alliance/dpa/dpa-Zentralbild | Sebastian Kahnert

Due to its quality of life, financial security and health care, Germany snagged the number 10 spot in the 2020 Global Retirement Index. So just how easy is it to plant roots in Deutschland after your retirement?

Applying for a residency permit

As with any non-EU or European Economic Area (EEA) national looking to stay in Germany for longer than a 90-day period, retirees will need to apply for a general resident’s permit (Aufenthaltserlaubnis) under which it will be possible to select retirement as a category. 

READ ALSO: How does Germany’s pension system measure up worldwide?

This is the same permit for those looking to work and study in Germany – but if you would like to do either after receiving a residency permit, you will need to explicitly change the category of the visa.

Applicants from certain third countries (such as the US, UK, Australia, South Africa, Japan, South Korea, Israel, Canada, and New Zealand) can first come to Germany on a normal tourist visa, and then apply for a residency permit when in the country. 

However, for anyone looking to spend their later years in Germany, it’s still advisable to apply at their home country’s consulate at least three months in advance to avoid any problems while in Germany.

Retirement visas still aren’t as common as employment visas, for example, so there could be a longer processing time. 

What do you need to retire in Germany?

To apply for a retirement visa, you’ll need proof of sufficient savings (through pensions, savings and investments) as well as a valid German health insurance. 

If you have previously worked in Germany for at least five years, you could qualify for Pensioner’s Health Insurance. Otherwise you’ll need to apply for one of the country’s many private health insurance plans. 

Take note, though, that not all are automatically accepted by the Ausländerbehörde (foreigners office), so this is something you’ll need to inquire about before purchasing a plan. 

READ ALSO: The perks of private health insurance for expats in Germany

The decision is still at the discretion of German authorities, and your case could be made stronger for various reasons, such as if you’re joining a family member or are married to a German. Initially retirement visas are usually given out for a year, with the possibility of renewal. 

Once you’ve lived in Germany for at least five full years, you can apply for a permanent residency permit, or a Niederlassungserlaubnis. To receive this, you will have to show at least a basic knowledge of the German language and culture.

READ ALSO: How to secure permanent residency in Germany

Taxation as a pensioner

In the Bundesrepublik, pensions are still listed as taxable income, meaning that you could be paying a hefty amount on the pension from your home country. But this is likely to less in the coming years.

Tax is owed when a pensioner’s total income exceeds the basic tax-free allowance of €9,186 per year, or €764 per month. From 2020 the annual taxable income for pensioners will increase by one percent until 2040 when a full 100 percent of pensions will be taxable.

American retirees in Germany will also still have to file US income taxes, even if they don’t owe any taxes back in the States. 

In the last few years there has been a push around Germany to raise the pension age to 69, up from 65-67, in light of rising lifespans.

READ ALSO: EXPLAINED: Could people in Germany still be working until the age of 68?