German Tax System

About German Tax System

Understanding the complexities of the German tax system is essential for maximizing potential deductions and ensuring a substantial tax refund. It’s crucial to identify all allowable claims and minimize taxable income wherever possible.

While it may seem that the income tax rate in Germany is as high as 40%, this perception often stems from a lack of awareness regarding mandatory paycheck deductions. In reality, the effective tax rate is considerably lower. For instance, a single individual earning €57k annually would typically face a tax bill of around €12k (21%) for the 2023 income tax year.

Other Statutory Deductions

These are the following statutory deductions which are not income tax but deducted from salary as per the German Tax System. Deduction of these funds from salary gives a perception of the high-income tax rate in Germany.

Solidaritätszuschlag (Solidarity surcharge) – 5.5% of income tax, non-refundable
Church tax (optional)
Krankenversicherung (Employee´s share in health insurance) – 8.2%, non-refundable
Pflegeversicherung (Nursing insurance scheme) – 1.175%, non-refundable
Rentenversicherung (Pension insurance fund) – 9.45%, refundable
Arbeitslosenversicherung (Unemployment insurance) – 1.5%, non-refundable

Adding all these elements up, you can see that this gets expensive. The good news is, that you will have a pretty comprehensive medical cover (by international standards) to pay for all trips to hospitals, doctors, and basic dental care as well as prescribed drugs from the pharmacy.

The state pension system is the element in social security refund that requires the biggest portion of contributions. However, many expatriates are actually in a position to get their German pension contributions refunded after leaving Germany (the main requirement is, that they have made less than 60 months of contributions to the German pension system).

German Tax Categories / German Tax Class (Steuerklasse)

According to the German Tax System, tax deductions from salary are based upon the tax class of an employee. Following is the list of defined classes under the German Tax Class system.

Class I = Single/Separated
Class II = Single parent
Class III = Married and the spouse has no income or lower-income
Class IV = Married and similar income to spouse
Class V = Opposite of class III, i.e. this is the class your lower-earning spouse has if you have III
Class VI= Employees who receive income from other employment

NOTE: For tax class III (Three), husband and wife should be registered and Living in Germany. If the spouse is living outside Germany then Tax Class I (One) will be applicable.

Tax Rates

No income tax is charged on the basic allowance, which is €8,354 for unmarried persons (class I) and €16,708 for jointly assessed married couples (class III).
Beyond this threshold, the marginal income tax rates of Germany increase linearly from 14% to 24% for a taxable income of €13,469 (€26,938 for married couples).
In the subsequent interval up to a taxable income of €52,881 (€105,762 for married couples), the marginal tax rate increases linearly from 24% to 42%.
The last change of rates occurs at a taxable income of €250,730 (€501,460 for married couples) when the marginal income tax rates in Germany jump from 42% to 45%.

Taxcard

The Lohnsteurkarte is a document issued by the German government that will accompany you through your every job. This document will be listed your personal situation and characteristics such as marital status, the number of kids, or religion. It holds your profile as a taxpayer so to speak, that will be linked to your tax number.
There are 2 offices you can go to get your taxcard, your local Bürgeramt, or the Finanzamt (Tax office).
It is given to your employer so taxes can be taken out of your wage every month. With the Lohnsteuerkarte in hands, the employer can communicate to tax services how much your wage is and thus, what share of tax should be transferred to them.