General

Deadlines for income tax in 2025

The following deadlines apply to income tax returns in 2025:

New features of the 2025 wage tax certificate

What will change for the wage tax certificate in 2025?

The BMF letter dated 05.09.2024 regulates the innovation with regard to the preparation of the wage tax certificate for the calendar years from 2025. These are identified in the letter by italics.

The following changes must be observed: 

• Third parties who make collectively agreed payments to employees (Section 38 (3a) sentence 1 Income Tax Act (EStG)) are obliged to submit a wage tax certificate to the tax authorities. If a third party is obliged to deduct wage tax, they must send the competent tax authority an electronic wage tax certificate for each employee (R 39c sentence 5 Wage Tax Guidelines (LStR) in conjunction with Section 41b (1) sentence 2 EStG)
• If data related to electronic wage tax deduction features has been retrieved for an employee but no wage has been paid, no wage tax certificate is required. 

In addition, the following points change on the printed form of the income tax certificate: 

Act on Tax Exemption up to the Minimum Subsistence Level

Overview of Act on Tax Exemption up to the Minimum Subsistence Level

In November 2024, the Bundestag and the Bundesrat passed the Act on Tax Exemption up to the Minimum Subsistence Level. The goal is to adjust the tax allowances in order to exempt the constitutionally required minimum subsistence level. Among other things, the increased cost of living is taken into account. The goal is to reduce the tax burden on employees. 

Adjustment of basic and child allowance

The basic and child allowance was increased retroactively in December for the calendar year 2024. Due to the application rules, the amended wage tax rates do not affect the already processed months January to November 2024, so no amendments need to be made for these months. The basis for the increase is the 14th minimum subsistence level report of 02.11.2022. According to this, the standard needs under social law have increased more than the minimum subsistence level report predicted. 

Please note:
Employees who are not in an employment relationship in December 2024 will receive the tax relief with the Income Tax Return 2024.

From December 2024, employers must apply the increased allowances to salaries paid after November 30, 2024. As a result, the tax relief becomes effective with the December payroll and overpaid taxes are refunded. This regulation also applies to solidarity surcharges and church tax.

Law on the Further Development of Tax Law and the Adjustment of the Income Tax Rate (Tax Development Act)

Overview of the Tax Development Act

In December 2024, the Bundestag and the Bundesrat approved the Tax Development Act. The Tax Development Act aimed to further develop and modernize tax law through adjustments to tax rates, increases in allowances, simplifications and measures against tax avoidance. However, only a fraction of the measures have been implemented.

Increase in basic and child allowance

As part of the Tax Development Act, the German government has planned to raise the basic and child allowance again. The top rate of tax is to be raised to €68,430.00 instead of €66,761.00 previously and an adjustment of the child benefit will be made. 

In addition, it was planned to raise the annual threshold for the solidarity surcharge from 1 January 2025. If the annual wage tax does not exceed this limit, no solitary surcharges are payable by the employee. 

Unimplemented changes

Many of the measures foreseen in the original draft legislation have not been implemented. This applies, inter alia, to the following regulations:

• Abolition of tax class combination III / V with transition to the factor procedure as of 01.01.2030
• Increase of the maximum gross list price for electric vehicles retroactively from €70,000.00 to €95,000.00 as of 01.07.2024
• Reporting obligation for domestic tax arrangements
• Adjustment of the regulation on non-profit status: Organizations should comment on political events in the future without losing their tax incentives, and a regulation on photovoltaic systems for non-profit organizations should be included. 
• Reform of collective depreciation 
• Expansion of tax research funding

Growth Opportunities Act

Overview of the Growth Opportunities Act

In March 2024, the Bundestag and the Bundesrat passed the Act to Strengthen Growth Opportunities, Investment, and Innovation as well as Tax Simplification and Fairness. In short: The Growth Opportunities Act. 

The goal of the Growth Opportunities Act is to promote economic growth, stimulate investment and strengthen the competitiveness of companies. This will be achieved through tax relief, investment incentives and measures to cut red tape.

Elimination of the one-fifth rule from 2025

In the case of multiannual remuneration within the meaning of Sections 34 (1), (2) Nos. 2 and 4 EStG, such as severance packages, the employer was previously obliged under Section 39 (3) sentence 9 EStG to tax these payments in accordance with the one-fifth rule and to show this on the wage tax certificate if certain conditions were met. 

As of 01.01.2025, this regulation of the one-fifth rule ceases to apply and payments are subject to the regular wage tax deduction procedure. This elimination is primarily intended to relieve the employer, since it is no longer necessary to apply necessary calculations and checks to determine the rate reduction. 

However, the employee can still make use of the rate reduction as part of the income tax return. However, the decision on granting is the sole responsibility of the tax office.

The employer is still obliged to show remuneration for multiple calendar years separately on the wage tax certificate. 

At the same time, Section 46(2) No. 5 EStG no longer applies, since the one-fifth rule no longer applies in the payroll tax deduction procedure, and the compulsory assessment is also omitted.

Adjustment of the proportional tax allowance for mature employees

If the taxable worker reaches the age of 64 before the beginning of the calendar year, the proportional tax allowance for mature employees shall be granted to them as a tax allowance on, inter alia, income from non-self-employed work (e.g. wages). The proportional tax allowance for mature employees is to be phased out by 2058. The Growth Opportunities Act will introduce the following changes from 2023:

• The percentage to be applied is now only 0.4 percentage points per year instead of 0.8 percentage points as before
• The maximum amount is reduced by €19.00 per year instead of €28.00 as before

The employer must apply the change for the first time from 01.01.2025 as part of the wage tax deduction procedure. To relieve the employer, the affected employees receive the amount as part of the income tax assessment.

Please note:
Employees who reach the age of 64 from 2058 will no longer receive a proportional tax allowance for mature employees due to the phasing out.

Adjustment of pension allowance

Pursuant to Section 19 (2) EStG, part of the benefits remain tax-free in the case of pensions such as company pensions or pensions of retired civil servants. This consists of the pension allowance, which is limited to a maximum amount, and an additional premium. Both are being phased out on a annual basis. From 2023, the following rules will apply: 

• The percentage to be applied will only decrease by 0.4 percentage points per year instead of 0.8 percentage points as before
• The maximum amount is reduced by €30.00 per year instead of €60.00 as before
• The surcharge is reduced annually by €9.00 instead of €18.00

To relieve the employer, the new amounts will not be taken into account in the wage tax deduction process until 2025. The increase for the years 2024 and 2025 is taken into account through the income tax assessment.

Please note:
The allowances will be phased out completely by 2058. As a result, pensions will be subject to full taxation at the start of a pension from 2058.

Annual Tax Act 2024

Overview of the Annual Tax Act 2024

On 22 November 2024, the Bundesrat approved the resolution of the Annual Tax Act 2024. The goal of the law is, among other things, to simplify and modernize tax law, promote digitalization and reduce red tape and administrative burden. It also includes adjustments to EU law and ECJ rulings. It is intended to promote affordable housing and support families through tax relief. 

Legislative procedure

ELStAM allowance

An allowance allows an employee to reduce their wage tax for the current year. At the request of the employee, the tax office calculates the allowance and transmits it electronically as an electronic income tax deduction characteristic (ELStAM) to the employer. The employee must reapply for the allowance at the latest every two years. Until now, the deadline for this began on October 1st of the previous year, for the year in which the allowance was to apply. With the Annual Tax Act 2024, the start date has been postponed to 1 November.

Relief amount for single parents 

Single employees whose household includes at least one child for whom child benefit is payable shall receive the relief amount for single parents in connection with tax class II. Previously, the amount of relief could only be claimed through the income tax return in the year of the separation. With the Annual Tax Act, a prorated relief amount for single parents in the case of permanently separated persons can be applied as an allowance for the wage tax deduction procedure from the month of separation.

Annual tax adjustment 

For § 42b EStG, it was specified retroactively to 01.01.2024 that an annual income tax adjustment is also excluded for the following conditions: 

• If different deductions due to the number of children were taken into account in calculating the provisional lump sum for nursing care insurance in the adjustment year. 
• If the employee had income from non-self-employed work abroad during the adjustment year, from which no domestic wage tax was withheld. 

These rules are designed to ensure that no incorrect annual wage tax is charged. Only the current employment relationship is considered for the purpose of checking whether an annual income tax adjustment is excluded. Other employers are not considered.

Qualification allowance 

Since 01.04.2024, employees have been entitled to a so-called qualification allowance through the Act to Strengthen the Promotion of Training and Continuing Education.

This is one of the tax-free wage replacement benefits and is subject to the progression proviso. Accordingly, it must be shown on the wage tax certificate and recorded separately by the employer in the payroll account. If an employee receives a qualification allowance, he is excluded from the annual income tax adjustment during the reference year.

Employer's right to apply a flat rate 

For certain taxable benefits, such as company events, recreation allowances or gifts, the employer has the option of applying wage tax at a fixed rate instead of calculating the tax individually for each employee. 

The employer can exercise his right to apply flat rate by specifying the flat-rate wage tax in the wage tax declaration. In addition to this, the Annual Tax Act 2024 also provides that the employer now has the option of declaring flat-rate taxation to the tax office in writing or electronically during the external wage tax audit. This scheme can be applied to cases not yet closed.

Employer's notice of exemption from liability

In the current year, the employer must ensure that the wage tax deduction is carried out correctly for all employees. Should subsequent amendments to wage tax occur, they must be made before the wage tax certificate is submitted. 

If the employer can no longer correct the wage tax because, among other things, the wage tax certificate has already been transmitted or the employee is no longer receiving wages, the employer must inform the tax office informally at the current time. The notice releases the employer from liability for incorrect tax collection. From 01.01.2026, this notice of exemption from liability shall be made exclusively electronically.