Taxation In Germany – Part 1
This article is primarily about taxes in Germany. Before moving, foreigners should know about the various measures of taxation in Germany. Here we’ll talk about the tax system and different types of taxes and tax classes.
Table of Contents
Tax System in Germany
German citizens and foreigners working in Germany need to pay taxes on their earnings. Taxation in Germany is designed in such a way that the tax rate increases with taxable income. Most citizens pay income tax through payroll deductions from their employers. Although if you have multiple professions, such as running your own business or are self-employed in Germany. Accordingly, you need to submit an annual tax return to work out your income tax.
What are Different Kinds of Taxes?
Taxation in Germany has different kinds of taxes. All of these types come under the mandatory tax. Here are the details of the different kinds of taxes. Altogether, you should understand the tax liabilities before paying for them. In German, a citizen’s tax liability depends on the amount of earned income.
- Withholding Tax: Withholding or payroll tax is income tax and other contributions that your employer withholds from your salary. This will apply to the majority of foreigners in Germany. It means your income tax rate has already been worked out and paid for you.
- Social Security Payments: Any employment income earned in Germany is subject to compulsory social security contributions. It covers Health insurance, Pension Insurance, Long-term care insurance & Unemployment insurance. Generally, these payments are shared between you and your employer. Your employer typically contributes 50% for these payments.
- Benefits In-Kind: You may also be obliged to pay tax on anything deemed a “benefit of a kind.” These are perks or benefits from your employer, such as using a company-owned car. The tax percentage is 1% of the car’s list price for company cars. It also includes VAT. Shares given as perks and bonuses are also subject to taxes.
- Solidarity Surcharge: This 5.5% tax supplement is payable on income tax, capital gains, and corporation taxes. Citizens who are single will only pay it if they earn a gross income of 61,700 euros.
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- Church Tax: When you register in Germany, you are asked to declare a religion. Suppose you declare yourself Protestant, Catholic, or Jewish. In that case, you are liable to pay the church tax, which the tax office collects on behalf of religious organizations in Germany. If you haven’t declared religion, you will not pay church tax.
- Radio Tax: The radio tax is the license fee or broadcasting contribution for the public German TV and radio. It is generally known as a radio and TV tax. Every household must pay a monthly charge of 18,36 euros to support independent public broadcasting in Germany.
- VAT Tax: The VAT tax is known as the value-added tax in Germany. The standard Vat tax rate is 19%, which applies to most goods and services. However, the reduced rate is 7%, which applies to foodstuffs, books, cultural services, hotel stay, and medical & dental care.
What are Tax Classes in Germany?
Tax classes in Germany determine the tax rate of income tax based on your marital status. It depends on your spouse’s income and the number of children you have. The amount of unemployment benefits and paid days off is determined by the tax class. Every employee must disclose their situation to German authorities.
Taxation in Germany knows that the higher-earning often bears more of the household’s costs. You can opt for a tax rebate when one of the partners earns less than the other. By following this, your tax class can move from 4 to tax class 3/5, which might increase the new salary for the higher earner. The higher earner in the household has to earn a good deal more for this to make sense. They should reach at least 60% of the total household income.
Let’s have a look at tax classes in Germany.
| Tax Class | Description |
| I | Single, widowed, civil partnership, divorced, spouse living abroad, or legally separated. |
| II | Single parents. |
| III | Recently widowed or married with a significantly larger income than the spouse. Both work in Germany. |
| IV | Married, both spouses have a similar income. |
| V | Married with a significantly smaller income than the spouse. |
| VI | Workers with multiple employments. |
The minimum taxable income is €9,169. Tax is not charged under this amount. The tax rate in Germany starts at 14%, rising in a series of income tax brackets to 45% for the highest earners over €265,327. Most of the foreigners fall into tax classes I or II. If both spouses work in Germany, tax class number IV can be used.
| German Income Tax Bands | German Tax Rate |
| Up to €9,984 | 0% |
| €9,985 – €58,596 | 14 – 42% |
| €58,597 – €277,825 | 42% |
| €277,826 and above | 45% |
How to Change the Tax Class in Germany?
In Germany, foreigners can choose the tax class change. The tax class change will happen in the month when the request was submitted. Then you can see a difference in your coming net salary. If both partners are employees and the income is taxable. You should have been through a tax class change in Germany.
There are two ways to change tax class in Germany.
- Offline Tax Class Change Request With A Form
The tax class changing process in Germany is elementary:
– Get a form for tax class change for married people. You can fill it out online on the official finance ministry website. After filling both pages of the form, you can download the form as a PDF file.
– Print it, and both partners should sign it.
– Send it to your Finanzamt.
- Online Tax Class Change Request With Elster
– Log in with your Elster account and head to the form.
– Select the year for which this should take place. However, you can select the current year if the application processes before the last day of November.
– The first page is your personal details.
– The Second page is your partner’s details.
– Ignore the third page if you do this application yourself. This is meant for tax consultants.
– The fourth page states what your current tax class combination is and which one you want to switch to.
In a Nutshell
Our primary purpose is to introduce the basic tenets of taxes in Germany. In the country, the tax system is prominent. German law has categorized the tax system into classes to make the citizens aware of which category they fall under. Additionally, an option is available for the tax class change. This will be helpful for you to make the saving on the tax deductions. However, informing the government about your correct tax class is also necessary. The types of taxes are well explained to understand the difference. Moreover, you can also check the tax percentage according to your earned income. By following the simple process of tax class change, you can inform the tax authorities in case there is a change in tax class. In our guide Taxation In Germany – I, you’ll get the information about the taxes in more detail.
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