Germany Tax Reform 2025: What Low and Middle Earners Need to Know

Introduction

Germany's current coalition government — a partnership between the CDU/CSU and the SPD, commonly called Schwarz-Rot — has put forward a tax reform package designed to ease the financial burden on low and middle income earners, with particular attention to families with children. For expats living and working in Germany, this is directly relevant: your monthly net salary (Nettolohn), your Kindergeld entitlement, and your overall financial planning could all be affected. This article breaks down what is being proposed, who benefits, and what to watch for.

What the Coalition Is Proposing

The reform targets two main areas:

1. Income tax bracket adjustments (Einkommensteuer)

Germany uses a progressive income tax system, meaning the more you earn, the higher the percentage you pay. One known problem is what German economists call the "cold progression" (kalte Progression): when wages rise with inflation, earners are pushed into higher tax brackets even though their real purchasing power has not increased. The coalition plans to adjust the tax brackets to compensate for inflation, meaning workers keep more of modest pay rises rather than handing them back to the tax office.

In practice, a single earner on a gross salary of around €35,000 per year could see their annual tax bill fall by several hundred euros. Exact figures depend on the final legislation, but early estimates from the German Finance Ministry suggest savings of between €300 and €800 per year for typical middle-income households.

2. Support for families with children

Families are a second priority. The coalition is discussing increases to the Kinderfreibetrag (child tax allowance) and/or adjustments to Kindergeld — the monthly child benefit payment currently set at €255 per child. Any increase to Kindergeld is automatically relevant to all EU and many non-EU residents in Germany who have children registered here.

Who Benefits Most

According to the coalition's own framing, the primary beneficiaries are:

• Low earners (below approximately €20,000 gross per year): smaller absolute amounts, but proportionally significant relief.
• Middle earners (approximately €20,000–€60,000 gross per year): the largest group in Germany's workforce, and the segment where cold progression has bitten hardest in recent inflation-heavy years.
• Families with children: whether through higher Kindergeld or expanded tax allowances, households with dependants are a stated focus.

High earners above the "rich tax" threshold (Reichensteuer, currently applying above approximately €277,000 gross per year) are not the target of this relief, and the coalition has signalled no changes at the very top of the income scale.

What This Means in Practical Euros

While the final law has not yet passed, indicative numbers circulating in the parliamentary debate give a sense of scale:

• A family with two children and a combined gross income of €55,000 could save approximately €1,200–€1,500 per year.
• A single worker earning €28,000 gross could save roughly €350–€500 per year.
• If Kindergeld is increased, even a modest rise of €10–€15 per child per month adds €120–€180 per year per child.

These are estimates, not guaranteed outcomes. The legislation must still pass through the Bundestag and Bundesrat.

Frequently Asked Questions

As an expat, do I pay German income tax and benefit from this reform?

If you live and work in Germany — regardless of nationality — you are subject to German income tax (Einkommensteuer) on your German-source income. This means the tax bracket adjustments would apply to you in the same way as to German citizens, assuming you file your taxes here. If you work remotely for a foreign employer, your situation may differ and you should consult a Steuerberater (tax advisor).

Am I entitled to Kindergeld as a non-German resident?

In most cases, yes. EU/EEA citizens working in Germany are generally entitled to Kindergeld for children living in Germany (or sometimes abroad, depending on the country). Non-EU citizens on certain residence permits — particularly those with an Aufenthaltstitel that permits employment — are also typically entitled. Check your specific situation via the Familienkasse (the office handling Kindergeld payments), which is part of the Federal Employment Agency (Bundesagentur für Arbeit).

When will these changes take effect?

The coalition is working towards passing the reform in 2025, with implementation potentially beginning from the 2025 tax year or the 2026 tax year depending on legislative speed. Stay updated via official government announcements at bundesfinanzministerium.de.

Conclusion and Next Steps

This tax reform is one of the most directly wallet-relevant pieces of legislation for working expats in Germany in recent years. The direction is clearly positive for low and middle earners. To make the most of any changes:

• File your annual tax return (Steuererklärung) — many expats overpay tax during the year and are owed a refund. This becomes even more worthwhile if brackets shift.
• Check your Kindergeld status if you have children.
• Consult a Steuerberater for personalised advice, particularly if your income situation is complex (freelance, dual-income household, foreign income).

We will update this article as the legislation progresses through parliament.

Source: Tagesschau