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Everything you need to know about Income Tax in Germany

Taxes in Germany might sound like a scary (and/or incredibly dull) topic at first. But let us (attempt to) assure you that this is not the case in our newcomer’s guide to the German tax system.

Everything you need to know about Income Tax in Germany

Are you moving to Germany to kickstart a shiny new job? Congratulations! We’re sure that as you brim over with excitement and devour German city guides, tax must be the last thing on your mind. But, at the risk of sounding like party poopers, taxes are pretty damn important to the German economic system.  

Lohnsteuer (income tax) in 2017, accounted for 27.6% of the government's revenue. Only slightly less than the Umsatzsteuer (VAT), according to offenerhaushalt.de. So it isn’t something that German tax authorities take lightly. (Does any tax authority ever take anything lightly?)

But there’s no need to fear. Unlike declining German articles and nouns, German taxes are nothing to be afraid of. Unusually enough for Germany, the tax system for employed people is actually quite straightforward. Don’t believe us? Read on!

Income tax (Lohnsteuer)

Income tax, AKA Lohnsteuer to give it its German gangsta name, is the most important tax for jobholders in Germany. A salaried person in Germany pays income tax on all income for one calendar year. How much income tax do you have to pay in 2020?
In Germany, everyone’s earnings are subject to a basic tax allowance. However, the general rule of thumb is - the higher your annual taxable income, the higher the rate of taxation. If you are single, you might not want to be for much longer as you will fit into one of these four income tax brackets:

  • Up to €9,408 - not taxable
  • Between €9,408 - €54,949 - incremental taxes from 14% to 42%

To “living the dream” brackets of:

  • Between €54,950 - €260,532 - 42%
  • Over €260,533 - 45%

So, for example, a monthly gross salary of €3,000 equals €1,960.29 net. The income tax in this case is 34.66%, according to Steuerklasse or tax bracket 1 (2019).

If you find these tax rates terrifyingly high, here’s a tip - the German state rewards good old traditional matrimony (or a registered civil partnership). In other words, getting hitched in Germany can bring home some major tax savings if one spouse earns significantly less than the other. So, it might be time to start swiping right more often and get this show on the road.
If you’ve been dithering for a while about popping the question to your partner, *hint* *hint*, NOW is the right time. No wonder the Germans have an international reputation for being romantic…

“Schatzi, I am now going to demonstrate the depth of my love for you, not with chocolates or flowers, but by asking you to marry me so that we can save money on taxes, which we can then use to pay for our honeymoon where we will irritate all of the other guests by leaving our towels on the sun-loungers on our way back from Schlager night in Mallorca.” “Ja, Ja, JAAAAAAAA!” Aside from what gets Germans horny, is there anything else you should know?

Well, it’s Germany we’re talking about so there’s always something else you should know. Employed people also pay a bunch of supplementary taxes and social security contributions besides income tax. Let’s take a look at them one by one - preferably read just before bed time.

Solidarity surcharge (Solidaritätszuschlag)

In Germany, there’s this thing called the “Solidarity Surcharge”. You may hear some of your German colleagues whining about it once in a while, when they’re not complaining about how their six weeks of annual leave is just too short that is.  

Since 1991, the solidarity surcharge has been levied on German taxpayers to help fund public investment in former East Germany. According to Bundesregierung.de, the solidarity surcharge will be discontinued entirely as of 2021. Watch this space.

So, if you want to get more bang for your buck, it might be worth waiting until 2021 to relocate here.

Church tax (Kirchensteuer)  

In Germany, members of certain churches and religious organisations have to pay a tax. This is called the church tax. That’s right folks, dropping a few coins in the collection box and proudly polishing your halo just doesn’t cut it here.

The following churches and religious communities collect tax from their members:

The Jewish Community (Jüdische Gemeinde)
The Evangelical Church (Evangelische Kirche)
The Roman Catholic Church (Römisch-Katholische Kirche)
The Old Catholic Church (Altkatholische Kirche)
Other Free Religious Communities (Freireligiöse Gemeinden)

The church tax is 8% of your income tax in Bavaria and Baden-Württemberg because they’re already very holy and pay less; if you live anywhere else in Germany, you will pay 9% for the privilege.
Various social security charges
Starting to feel sleepy? Hang on, we’re not done yet - there are even more deductions from your salary!

Every employed person in Germany has to pay social security contributions. Let’s dive right in and get an understanding of each of them. (Go put your pajamas on - it’s almost time.)

Pension insurance (RV/ Rentenversicherung)

This is a compulsory deduction for pension funds. However, note that this does not go towards your own individual pension plan. It’s paid by the working population to sustain people who are currently in retirement. And, in Germany, that is a lot of people.
As of 2018, this deduction amounts to 9.3% of your gross monthly salary and both you and your employer contribute this amount. Introduced by Otto von Bismarck in 1889, he probably never expected people to live this long but, as it is, we’re still stuck with it today. Thanks, Otto.

Health insurance (KV/ Krankenversicherung)

This is the obligatory contribution towards German healthcare funds. The current statutory health insurance rate is 14.6% of your gross monthly income.
You and your employer share the health insurance deduction costs equally. This means you pay 7.3% and your employer pays 7.3% of your gross income.
Don’t let it go to waste and get your annual check-ups!

Unemployment insurance (AV/ Arbeitslosenversicherung)

Just when you thought you were done watching your money disappear, there’s more. Unemployment insurance is another mandatory deduction for all employees in Germany. Just like the health insurance contribution, your employer pays half of the unemployment insurance, you pay the other.

This contribution is 3.0% of your gross taxable income, which means you and your employer each pay 1.5% each every month.

(Phew, you’ll sleep well after this...)

But how do you pay the taxes to the authorities?

When it comes to paying taxes to the tax office, employed people in Germany don’t have to lift a finger! Your employer’s accounting department will automatically deduct the income tax and other deductions from your gross salary (Bruttogehalt) and submit it to the tax office on your behalf. You’ll barely notice that 50% of your salary has vanished!

So, that brings us to the end of our fascinating look at the world of income tax in Germany. What do you think about paying nearly half of your salary in taxes and social security contributions?

Sources

Seriously GIF. Giphy, 06 Feb. 2020, https://giphy.com/gifs/reaction-E7iIfUlWHBmh2

Time GIF, Giphy, 06 Feb. 2020, https://giphy.com/gifs/time-D833KEj1Kw2uQ

Make It Rain Reaction GIF, Giphy, 06 Feb. 2020 https://giphy.com/gifs/baby-money-little-rascals-l0HFkA6omUyjVYqw8

Take My Money GIF By Memecandy, Giphy, 06 Feb. 2020 https://giphy.com/gifs/memecandy-WtaxUBqSlYuXpoZXQv

Purse GIF, Giphy, 06 Feb. 2020, https://giphy.com/gifs/witcher-toss-a-coin-to-your-KAe6LbWoqfbGqAFCZf

Yamini Gautam
Giphy.com

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