Recent legislative changes in Germany aim to alleviate cold progression and enhance family support. Starting in 2025, child benefits will increase, and tax allowances will rise significantly. The adjustments address the tax burden due to inflation and are expected to relieve families financially. However, many households may still face reduced disposable income due to rising social contributions. While the law is set to pass by year-end, immediate tax relief may not be reflected in January pay slips.
Boosting Child Benefits and Tax Relief: Recent Legislative Changes in Germany
The Bundesrat has recently approved a significant law aimed at providing relief from cold progression and enhancing support for families, following the Bundestag’s earlier decision. But what does this entail for citizens and families?
The legislation focuses on two primary objectives: addressing the issue of cold progression in income tax and increasing assistance for families, reflecting Chancellor Olaf Scholz’s commitment to revitalize the economy and support households before the holiday season.
Enhanced Child Benefits and Tax Allowances
Starting in 2025, child benefits will see an increase of five euros, bringing the monthly total to 255 euros, and will rise by another four euros to 259 euros in 2026.
Additionally, the immediate child supplement will increase from 20 euros to 25 euros per month, benefiting children and teenagers who receive citizen’s income or social assistance, as well as those from low-income working families.
The tax-free child allowance is also set to rise by 60 euros, reaching 6,672 euros in January, with a further increase of 156 euros to 6,828 euros planned for 2026. According to estimates from the Greens, these changes will provide a relief of 306 euros for a family with two children earning 60,000 euros next year.
However, securing a majority in the Bundesrat remains a challenge.
Understanding Cold Progression
Cold progression refers to the phenomenon where taxpayers face higher tax rates due to rising incomes that merely keep pace with inflation. Without this reform, citizens would be required to pay more taxes starting in January, despite their salary increases being equivalent to inflation rates.
To combat this issue, key tax figures will be adjusted, ensuring that higher tax rates apply only after certain thresholds are met. Notably, the basic tax allowance will increase by 312 euros, bringing it to 12,096 euros, with an additional rise planned for 2026 to 12,348 euros.
These adjustments are based on inflation calculations and the subsistence minimum in Germany. Additionally, other key figures in the tax rate will see a 2.6 percent adjustment, preventing tax increases solely attributed to inflation.
The exemption threshold for the solidarity surcharge will also be modified, while the rich tax limit, which exceeds the top tax rate, will remain unchanged.
Impact on State Revenues
The adjustments in tax rates will lead to a significant loss of tax revenue for federal states. Estimates from the budget committee suggest that states will collect approximately 2.6 billion euros less in revenue next year, with losses potentially reaching nearly 5.2 billion euros by 2026.
Collectively, the federal government, states, and municipalities may face a shortfall of around 7.2 billion euros next year, with long-term costs projected to exceed 13.5 to 14.8 billion euros.
Net Income Challenges for Households
Despite the anticipated reliefs, many households may actually see a decrease in disposable income in the upcoming year, as social contributions are expected to rise, potentially offsetting the tax reliefs.
For example, a single individual earning a gross income of 50,000 euros may experience a reduction in their net financial burden from 233 euros to only 38 euros annually. In many cases, single parents might find that the increase in child benefits and changes to the income tax rate do not sufficiently alleviate financial pressures. However, couples with children assessed jointly may benefit more, depending on their income situation.
Following the dissolution of the traffic light coalition, an agreement was reached among the SPD, Greens, and FDP on the tax relief and enhancements to child benefits.
Delayed Implementation of Tax Reliefs
Even if the law is enacted by year-end, taxpayers may not experience the tax relief benefits immediately in January.
According to the Ministry of Finance, it will take time for these changes to be processed administratively and reflected on pay slips. However, the increased child benefits are expected to be disbursed starting in January.
These legislative plans were initially part of the tax development law proposed by the traffic light government, which included additional economic relief measures, such as incentives for e-mobility and improved depreciation rules. Unfortunately, these proposals faced opposition from the Union and FDP, leading to the cancellation of planned changes to the tax class system.