Coalition Reform Package Brings Tax Relief

Germany’s coalition government has agreed on its most far-reaching economic plan since taking office, and the new reform package will touch the pay, taxes and job contracts of millions of people living in the country. On 2 July 2026 the coalition led by Chancellor Friedrich Merz presented a list of 34 measures under the name Programm fuer Wachstum und Beschaeftigung, which translates as Programme for Growth and Employment. The centrepiece is about 10 billion euros in income-tax relief for low and middle earners, set to take effect from 1 January 2027.

What the reform package contains

The reform package is a broad list of 34 points that the coalition partners describe as a plan to restart economic growth and create jobs. It bundles together changes to income tax, a new top tax rate for very high earners, a long-planned overhaul of the state pension system, and looser rules for fixed-term employment contracts. Chancellor Merz framed the plan as proof that Germany remains, in his words, a strong country economically, politically and socially.

According to ZDFheute, the government wants the tax measures to reach ordinary households first, while asking the highest earners to carry a slightly larger share. Al Jazeera reported that the package was hammered out after long negotiations between the coalition partners and represents a political breakthrough after months of internal disagreement. The measures still need to pass through the Bundestag, the federal parliament, before they become law, and the government has said it aims to finish much of that work by the end of 2026.

Tax relief for low and middle earners

The most direct benefit for residents is the roughly 10 billion euros in annual income-tax relief aimed at people on lower and middle incomes. The relief is scheduled to begin on 1 January 2027. ZDFheute gave the example of a working family with two children and an annual income of 60,000 euros, which could save more than 600 euros a year by 2028 once the changes take full effect.

For foreigners who work in Germany and pay Lohnsteuer, the wage tax deducted directly from monthly pay, the change would show up as a slightly higher net salary rather than a one-off payment. Because the German tax system is progressive, the exact benefit depends on income, family status and the tax class, known as Steuerklasse, that applies to each worker. The government has also promised a broader simplification of the tax rules together with the federal states by autumn, though the details of that effort remain open.

Higher rates for top earners

To help pay for the relief, the coalition agreed to raise the so-called Reichensteuer, the additional top rate on very high incomes. According to ZDFheute, a 45 percent rate would apply to income above 250,000 euros, rising to 47 percent for income above 280,000 euros. Finance Minister Lars Klingbeil said the highest earners in the country would take on a larger share so that Germany can move forward, describing the step as a matter of fairness.

This part of the plan affects only a small group of taxpayers, but it signals the political balance the coalition is trying to strike. The government wants to be seen as easing the burden on ordinary workers while asking those at the very top to contribute more. For most expats, who fall well below these thresholds, the higher top rate will have no direct effect on their own tax bills.

Pensions and longer fixed-term contracts

The reform package also opens two areas that reach far into working life. On pensions, the coalition agreed to put into law the recommendations of the government-appointed pension commission, the Alterssicherungskommission. Al Jazeera reported that after 2031 the retirement age would be linked to life expectancy, which could push it beyond the current ceiling of 67 over the coming decades. The plan also foresees a new capital-based element, referred to as a Kapitalrente, to support the system over the long term.

On the labour market, the government wants to extend the sachgrundlose Befristung, a fixed-term contract that an employer can offer without stating a specific reason. Under the plan this type of contract could last up to 48 months and be renewed up to six times, double the previous limits. Supporters say this gives companies more confidence to hire, while critics warn it could leave more workers, including many newcomers, in insecure jobs for longer. Anyone weighing a job offer can find general guidance on employment and residence rules in our How to Germany guides.

What the reform package means for expats

For foreigners building a life in Germany, the reform package is a mixed picture that will unfold over several years. The income-tax relief from 2027 should leave more money in the pockets of most working residents, which matters at a time when everyday costs remain high. The higher top rate will pass most people by, while the pension and contract changes deserve closer attention because they shape long-term security rather than the next payslip.

None of these measures is final until the Bundestag votes them into law, so the exact figures could still shift during the parliamentary process. Workers on fixed-term contracts, in particular, may want to follow how the Befristung rules develop before signing a long extension. For practical background on taxes, work and settling in, our How to Germany section explains the systems these reforms are trying to change.