Germany’s Tax Overhaul Raises the Bar for High Earners While Easing the Burden on Families

Chancellor Merz and Finance Minister Klingbeil unveil sweeping tax reform: higher allowances for low-income workers, a lower rich tax threshold at 45%, and new 47% bracket for top earners.

Chancellor Merz and Finance Minister Klingbeil unveiled a sweeping tax reform package on Tuesday, reshaping everything from personal allowances to the so-called “rich tax” threshold. The Handelsblatt has since published detailed calculations showing how the measures will affect take-home pay, with some changes taking effect immediately and others phased in over the next several years.

Lower-Income Workers Get a Boost Through Higher Allowances

At the heart of the plan is relief for low- and middle-income earners. The basic tax-free allowance will climb from €12,348 to €12,900, while the child allowance rises from €4,878 to €5,123. Child benefit and the employee lump-sum deduction are also set to increase.

Further adjustments are scheduled for 2027 and 2028, according to industry experts. The employee lump-sum deduction will jump by €200 to €1,430, and child benefit could reach €272 per month by 2028. The government also plans to flatten the second progression zone in the tax tariff to curb the impact of cold progression—the phenomenon where inflation pushes workers into higher tax brackets without real income gains.

Family Relief Estimates Vary Across Models

Exactly how much families will save depends on which calculation you trust. The Institute of the German Economy (IW) projects an annual relief of €576 for a married couple with two children. An official government document, however, puts the figure at over €600 for the same household type.

Experts at ETL Service GmbH align with the government’s estimate, predicting more than €600 in yearly savings for a family earning €60,000 gross with two children. The discrepancies stem from differing assumptions about how various reform components—such as allowances and transfer payments—interact.

High Earners Face Steeper Rates, Mini-Jobs Get Costlier

While lower incomes benefit, top earners will see a heavier tax load. The “rich tax” will now kick in at a taxable income of €250,000, with a rate of 45%, down from the previous threshold of €277,825. A new bracket is also being introduced: incomes above €280,000 will be taxed at 47%.

Mini-job holders face significant changes too. The flat tax on these positions rises from 2% to 5%. Starting January 1, 2027, mini-jobbers must also contribute to statutory health insurance at a rate of 14.6%, plus any additional supplemental contributions.

Labor Law Shifts and Subsidy Cuts Complete the Package

Beyond taxes, the reform touches labor and social legislation. The option for phone-based sick notes will be eliminated; instead, a medical certificate of incapacity for work (AU) will be required from the very first day of illness. To boost labor market flexibility, the maximum duration for fixed-term employment contracts doubles from 24 to 48 months—a temporary measure valid until the end of 2030.

To help finance these relief measures, the government is trimming the “handyman bonus.” The tax deduction for skilled trades services drops from 20% to 15%, cutting the maximum subsidy from €1,200 to €900.