How can parental allowance be increased by changing the tax class?

The amount of parental allowance (Elterngeld) in Germany primarily depends on the net income earned in the period before the child’s birth. Few people realize, however, that the tax class can significantly influence the amount of this benefit. A timely change of tax class can result in a substantially higher parental allowance. The following explains in which cases this can be considered and how this mechanism works in the German tax system.

Why does the tax class determine the amount of parental allowance? How an application can increase the monthly benefit

The amount of parental benefits in Germany is not determined at random. The basis for calculating parental allowance is the net income earned in the 12 months prior to the start of maternity protection or – in the case of fathers – the month of the child’s birth. This means that the authority uses the remuneration remaining after deduction of taxes and social security contributions, not the gross amount stated in the employment contract. In practice, the type of tax treatment of wages, and specifically the tax class in which the income was settled during this period, is therefore of considerable importance. This determines the amount of wage tax withheld and thus the net salary ultimately remaining. If a less favorable tax class applied in the year before the child’s birth, net income was lower – which directly results in a lower parental allowance.

It is often only in the context of family planning that many people become aware that the German tax system can directly influence the amount of parental allowance. This is not about tricks or circumventing legal provisions. German law expressly allows expectant parents to adjust their tax class to their planned family situation in order to increase the benefit amount. In marriages or registered civil partnerships in which both partners are employed, choosing an appropriate tax class in Germany can significantly increase one partner’s net income; this is precisely the figure later used to calculate parental allowance. This topic should therefore be considered not only from a tax perspective, but also as part of the family’s long-term financial planning. Sometimes a single administrative decision – the application to change tax class – leads to an increased benefit for many months after the child’s birth.

Changing tax class before birth – a simple measure that affects parental allowance for up to one year

Many expectant parents assume that tax-related decisions need only be made after the child is born. However, the system for calculating parental allowance works retrospectively, which is why the relevant steps must be taken at an early stage. The authority does not look at the tax situation at the time of application, but analyzes a reference period that generally comprises the 12 months before the month of birth. If a more favorable tax class applied during this period – for example, III instead of V – the net income is higher, which directly affects the amount of parental allowance. For this reason, German tax advisors often emphasize that a change of tax class at the right time can lead to noticeably higher payments from the authority over many months.

Decisions should not be taken hastily, however. It must be borne in mind that a change of tax class does not take effect immediately, but generally applies from the month after the application is filed. If a pregnancy is planned or has already begun, the timing of the application therefore becomes highly significant. In many constellations, the person who will receive parental allowance should have the more favorable tax class in order to achieve higher net income. In practice, married couples often choose the III/V or IV/IV combination, depending on the partners’ income situation. At first glance this appears to be merely an administrative formality, but it can in fact decisively determine the amount of financial support in the child’s first year of life.

The IV/IV combination with the so‑called factor method should also be mentioned. This option is particularly advantageous for couples where both partners earn income, but at different levels. By applying a factor, wage tax deductions are more accurately adjusted to the actual income situation from the outset, helping to avoid large additional payments or refunds in the annual tax assessment. In the context of parental allowance, this can represent a useful compromise – net income becomes more stable and at the same time the actual earnings in the period relevant for the authority are better reflected.

When should the tax class be changed so that parental allowance is higher? A crucial moment during pregnancy

For parental allowance, not only the change of tax class itself is decisive, but above all the timing of its implementation. Under German law, the assessment period of twelve months before the child’s birth is decisive, because the income relevant for calculating the benefit is derived from this period. If different tax classes were applied during this time, the authority will take into account the tax class that applied during the majority of the period analyzed. For this reason, tax professionals often recommend making the change a few months before the birth, so that the new tax class applies for the larger part of the assessment period. Otherwise, it may happen that despite changing the tax class, the earlier, less favorable taxation still remains decisive.

In practice, this requires conscious financial planning already during pregnancy. Many expectant parents are not aware that every month with a more favorable tax class improves the chances of receiving higher parental allowance. Postponing the decision to a later date is therefore not advisable. It should also be noted that changing tax class is a relatively straightforward procedure; the application is submitted to the tax office responsible for the place of residence. A single administrative decision can therefore affect the family’s financial situation in the child’s first year of life, when income is often lower due to caring for the newborn.

Is changing tax class solely to increase parental allowance legal? Legal basis and case law

One of the most common questions expectant parents ask concerns the legality of such an approach. There is often uncertainty as to whether changing tax class solely with the aim of increasing parental allowance could be considered an abuse of rights. German case law has, however, dispelled these doubts. The courts have repeatedly confirmed that changing tax class during pregnancy is legally permissible, even if the main motivation is to obtain higher parental allowance in Germany. The background is that the tax system grants spouses a flexible choice of tax classes and that the rules on parental allowance are based on the actual net income earned in the assessment period. As long as the law allows the tax class to be changed, the authority cannot question the taxpayer’s decision merely because it influences the amount of the benefit.

This aspect is important, since many people fear that such a decision could later be challenged by the authority or lead to a reclaim of benefits. In practice, however, changing tax class is a common tool of financial family planning. It should only be borne in mind that parental allowance is calculated on the basis of net income determined in accordance with statutory provisions, taking into account taxes and social security contributions; a change of tax class therefore does not automatically lead to the maximum possible benefit.

Nevertheless, it can considerably increase the benefit amount, especially if the person planning to receive parental allowance was previously classified in a less favorable tax class. For this reason, reviewing the tax class is one of the first steps that expectant parents take in German tax consulting when planning for the period after the child’s birth. In addition, it should be borne in mind that a later tax return for Germany offers the opportunity to settle the tax situation definitively and to check whether all applicable allowances and deductions have been correctly taken into account.