How will Germany's income tax reforms affect you?

Germany's coalition government has agreed on a 34-point reform package on taxes, labour and reduction of bureaucracy.

Regarding the tax reform, lawmakers in the federal cabinet suggest the proposals will relieve people and families on low and middle incomes.

This relief is to be counter-financed in part by changes to taxes on high incomes.

The reforms would take effect from the start of 2027, and the total sum of the tax relief is said to amount to 10 billion euros per year.

Here's what changing:

Tax relief

Tax relief for low- and middle income workers and families is to come primarily in the increase to three of Germany's major 'allowances': with an increases in the 'basic allowance' (Grundfreibetrag), and to the 'child allowance' (Kinderfreibetrag) and 'employee allowance' (Arbeitnehmerpauschbetrag).

These allowances set the tax-free income thresholds for workers and working parents, so an increase to these limits effectively means people will see a bit more of their base income not taxed. In 2026, Germany basic allowance is €12,348. This amount is generally adjusted upward slightly each year to keep pace with a rising 'subsistence minimum', or the amount officially considered the minimum cost to live in Germany.

Germany's cash benefit for parents, known as Kindergeld, is also to rise in two stages to €272 euros in 2028. Currently, its set at €259 euros per month and child, regardless of income.

Additionally it is proposed to "flatten" the so-called second progression zone, or reduce how steeply the tax rate rises as incomes increase, which should bring some relief for people on mid-level salaries.

The top tax rate (known as Spitzensteuersatz), which currently applies to workers earning a taxable income of €69,879 or more, is to be raised.

When the reform measures are in full effect, a working family with two children and a total taxable income of €60,000 could be relieved of more than €600 annually from 2028 compared to today, according to government officials.

Changes to the 'rich tax'

Counter-financing for the above relief is to come mainly from changes in taxes for the highest earners, known as the "rich tax" (Reichensteuer).

This tax bracket (which is different from the above mentioned 'top tax rate') is to be split: a tax rate of 45 percent is to apply from a taxable income of €250,000, and a rate of 47 percent from a taxable income of €280,000. Currently, the maximum rich tax rate is 45 percent, which applies from a taxable income of €277,826.

Deductions for craftsmen's services, i.e. for payments for home renovations, maintenance and modernisation, is to be reduced from 20 percent to 15 percent.

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Also the lump-sum tax rate for mini-jobs is to be raised from two to five percent. Previously there had been talk about Germany scrapping mini-jobs altogether as part of pension reform plans.

"Today is a good day," said Chancellor Friedrich Merz as the tax reform was announced at a press conference on Thursday. "We want to get Germany back on track, now it is clear that this is possible."

Thus far unable to address Germany's economic woes, the chancellor has been eager to bring forward tax changes, and other reforms, that he says are needed to boost economic activity.

With the reforms, the "political centre, here and now" shows that it has the strength to shape and modernise the country, he added.

But compared to some of the proposals that had been mentioned in previous talks the tax reform as it stands is modest.

CSU leader Markus Söder suggested that the reform comes not as a "Big Bang," but another step away from crisis.

The SPD had sought a higher top tax rate and a higher inheritance tax, but the union parties rejected these proposals.

In addition to the above tax changes, the coalition's "Programme for Recovery and Employment" includes measures aimed at reducing bureaucracy and tightening sick leave policy.

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Notably, proposals to relax working time regulations were not included, although they are expected to be discussed again later in the year.

With reporting by DPA.