The coalition has agreed on a reform of income tax. Which changes could take effect in Germany from 2027?

The German coalition has agreed on the direction of changes to income tax, which are primarily intended to provide relief for employees, families, and individuals with low and middle incomes. The planned reform includes, among other things, a higher basic tax allowance, more favorable tax rates, and increased support for families with children. Although these are currently political agreements, they could significantly affect the amount of tax and net incomes from 2027 onward. 

Income tax reform – what has the coalition agreed on?

The German governing coalition has reached a political agreement on changes to income tax. The announced reform is primarily aimed at providing relief for individuals with low and middle incomes, employees, and families with children. The planned measures for relief are expected to total around 10 billion euros per year.

The first stage of the reform is set to take effect on January 1, 2027, while the full impact for taxpayers will become apparent in 2028. It should be noted that the coalition agreements do not yet constitute applicable law. Before the introduction of the new regulations, a draft law must be prepared and the full legislative procedure completed. The concrete amounts may therefore still change.

The main aim of the planned reform is to increase the net income of those in active employment. This effect is to be achieved by increasing the basic allowance, raising the employee lump-sum deduction, mitigating tax progression, and providing additional benefits for families.

The changes are to be implemented in two stages—in 2027 and 2028. At present, primarily the target values that are to apply after full implementation of the reform are known.

The final amounts of the basic allowance, child benefit, and child allowance will be determined in the course of the legislative process, among other things after publication of the next German subsistence minimum report. Therefore, the amounts of 12,900 euros and 272 euros are currently to be regarded as target values and not as finally adopted thresholds.

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For household or business planning purposes, the announced amounts should not currently be used as a basis. After the final law enters into force, the new regulations should be reviewed using one’s own data—particularly for self-employment and for ongoing tax prepayments. If necessary, it is advisable to update the income forecast and, if appropriate, submit an application to the tax office to adjust prepayments in order to avoid subsequent back payments in the context of the annual tax assessment. 

Higher basic allowance

According to the political agreement, the basic allowance is to be increased gradually and will amount to approximately 12,900 euros in 2028. This regulation will benefit employees, pensioners, and self-employed persons alike, provided that their income is subject to income tax.

In practice, even the increase in the basic allowance reduces the taxable base. However, this does not mean that every taxable person will receive a refund equal to the full increase amount. The actual relief depends on the level of income, individual tax rate, family situation, as well as other benefits and deductions.

Higher employee lump-sum deduction without proof of expenses

Another important change is the increase in the employee lump-sum deduction, i.e., the flat-rate deduction for work-related expenses for employees. The coalition plans an increase by 200 euros to around 1,430 euros per year.

This amount is taken into account for payroll tax purposes even if no individual work-related expenses are proven. Persons whose actual work-related expenses do not exceed the lump sum may therefore automatically claim the higher deduction.

However, where higher expenses exist—for example, for commuting, maintaining a second household, job-related training, work equipment, or furnishing a home office—these may still be claimed as actual work-related expenses on the tax return.

Mitigated tax progression

The German income tax system is progressive. This means that as income increases, the applicable tax rate also rises. The coalition plans to flatten the progression curve for taxable incomes between approximately 17,800 and 70,600 euros.

At the same time, the 42% tax rate is to remain unchanged, but will only be applied for taxable income of over 70,600 euros. As a result, the classification in the highest regular tax rate will take effect later for taxpayers with middle to higher incomes.

Families with children are expected to benefit the most

One of the main objectives of the reform is to strengthen support for families. Child benefit is to be increased in two steps and is expected to reach 272 euros per month per child in 2028. In parallel, the child allowance, i.e. the tax-free allowance for children, is also to be raised.

As part of the annual tax assessment, the tax office checks whether the entitlement to paid child benefit or the advantage from the child allowance is more favorable. The more favorable option is then applied for the parents. The planned increase in both amounts should therefore benefit both families who primarily claim child benefit and parents for whom the tax allowance is more advantageous.

According to estimates by the Federal Ministry of Finance, a family of four with two children and a middle income could receive over 600 euros more per year than under current regulations after full implementation of the reform.

Who else benefits from the reform? Sample savings in 2028

The Federal Ministry of Finance has published initial examples that illustrate the overall effect of the planned changes. The calculations refer to the full implementation of the reform in 2028 and include, among other things, the increase in the basic allowance, changes to the tax scale, as well as increased support for children.

The calculations presented serve as orientation aids, as they are based on current contribution and tax parameters. These figures may change by 2028. Therefore, the actual benefits may differ from the examples provided.

Self-employed persons and shareholders of certain partnerships are also expected to benefit from the reform. However, the package of measures does not include any anticipated changes regarding the taxation of retained earnings in the company, which may limit its relevance for larger enterprises.

Higher tax burden for top earners

The relief for the majority of taxpayers is to be partially financed by higher burdens on individuals with very high incomes.

The tax rate referred to as the wealth tax is intended to be:

The previous tax rate of 45% only applied from a higher income threshold. The reform therefore provides for both an earlier application and the introduction of an additional tax rate of 47% for top incomes. At the same time, the coalition does not plan to raise the standard tax rate of 42%.

Certain tax benefits will be restricted

The reform does not mean relief only. To finance the package, the coalition plans to restrict certain tax benefits.

The most noticeable change could affect craft services in private households. Currently, 20% of certain labor costs, up to a maximum of 1,200 euros per year, can be deducted from tax. A reduction of the deduction to 15% is planned, which will reduce the maximum tax benefit to 900 euros per year.

The flat-rate tax for mini-jobs is also to be increased from 2% to 5%. From the employee’s perspective, this does not necessarily mean a reduction in net salary, as the flat tax is usually borne by the employer. However, the costs of such employment will increase and this could be relevant for companies employing mini-job workers.

Are the new regulations already certain?

No. The agreements of 1 July 2026 constitute a political coalition agreement and are not yet finalized tax law. The Federal Ministry of Finance must still provide detailed calculations as well as concrete thresholds and values for the new tariff.

Subsequently,the draft law must undergo the legislative procedure. Depending on the final content of the law, the approval of the Bundesrat may also be required. Only after completion of this process will it be possible to determine precisely which amounts will apply in 2027 and 2028. At present, therefore, no applications need to be submitted or adjustments made within the scope of tax returns. Nevertheless, continued observation of the legislative process is recommended, particularly in connection with a planned job change, commencement of self-employment or in order to assess the future net income of a family.

In practice,the reform could mean a slightly higher net salary for the majority of employees, mainly due to a higher basic allowance, increased employee lump-sum deductions and more moderate tax progression. The greatest benefit is expected for families with children, while high earners and taxpayers deducting craft services may benefit less. The actual impact will only become clear once the final thresholds and tax rates are established.