Income tax reform 2027: who gains, who pays

The income tax reform 2027 is moving through the Bundestag, and it will change payslips, child benefit and the cost of mini-jobs from 1 January. The government's bill, the Einkommensteuerreformgesetz 2027, raises the tax-free basic allowance, lifts Kindergeld to 267 euros per child, increases the lump sum that employees can deduct for work expenses and pays for part of this with higher rates for top earners and cuts to some tax breaks. At a public hearing of the Finance Committee on 4 November, many experts said the relief is smaller than promised.

The bill is not yet law. The cabinet approved the draft on 2 September, the Bundestag held its first reading on 8 October, and the Bundesrat, the chamber of the federal states, must also agree before the changes take effect. The figures below are those of the government draft and could still change.

Income tax reform 2027: higher allowances for everyone

The Grundfreibetrag, the share of income on which no income tax is due, is set to rise from 12,348 euros to 12,564 euros in 2027 and to 12,900 euros in 2028. For couples who are taxed jointly, the amount doubles, so they would pay no income tax on the first 25,128 euros in 2027, the Stuttgarter Zeitung points out. According to the federal government, the tax curve is also made somewhat flatter for taxable incomes between 17,800 and 70,600 euros, so that the 42 percent top rate starts slightly later than today.

Employees also get a bigger Arbeitnehmer-Pauschbetrag, the flat amount the tax office deducts for work-related costs without asking for receipts. It rises from 1,230 to 1,430 euros a year. People whose real costs for commuting, equipment or training are already higher than that gain nothing from this step, because they claim their actual costs anyway. The law firm MTR Legal, citing the bill, expects about 1.3 million taxpayers to no longer need to list their work expenses in the Anlage N of their tax return.

There is a further change for people who work on Sundays and public holidays. The surcharges they receive for this are partly tax-free, but only up to a certain hourly wage. That cap rises from 50 to 75 euros from 1 January 2027, while the cap for night work stays at 50 euros. In its statement of 16 October, the Bundesrat asked the government to consider raising the surcharge rates moderately instead, MTR Legal reports.

Kindergeld rises to 267 euros per child

Families are the main target of the package. Kindergeld, the monthly child benefit, goes up from 259 to 267 euros per child in January 2027 and to 272 euros in January 2028. That is 96 euros more per child in the first year. According to the Stuttgarter Zeitung, families who already receive the benefit do not need to apply again, as the higher amount is paid automatically.

The Kinderfreibetrag, the tax allowance for children, rises by 300 euros from 6,828 to 7,128 euros per child. Together with the unchanged allowance of 2,928 euros for care, upbringing and education, the total tax-free amount per child grows from 9,756 to 10,056 euros. Parents do not get both benefits in full. The tax office checks each year whether the allowance saves more tax than the Kindergeld already paid, which tends to be the case only at higher incomes. The government calculates that a working family with two children and a taxable income of 60,000 euros would pay more than 600 euros less per year from 2028 than today. Finance Minister Lars Klingbeil (SPD) used the same figure in the Bundestag debate.

Who pays for the income tax reform 2027

To finance the relief, which the government puts at more than 10 billion euros over 2027 and 2028, the bill asks more from top earners and trims several tax breaks. The so-called Reichensteuer, the 45 percent rate for very high incomes, is to apply from a taxable income of 250,000 euros, earlier than today. A new top rate of 47 percent would start at 280,000 euros, which adds up to about 49.6 percent including the solidarity surcharge.

Households that hire tradespeople lose part of a popular deduction. Today, 20 percent of the labour costs for repairs and renovation at home can be deducted directly from the tax bill, up to 1,200 euros a year. Under the bill, the rate falls to 15 percent and the maximum to 900 euros.

Mini-jobs also become more expensive. The flat tax that employers can pay on these small jobs instead of using the worker's tax class rises from 2 to 5 percent of pay. The finance portal finanz.de has calculated what that means for a full mini-job at the new earnings limit of 633 euros a month, which rises with the minimum wage in January: the tax goes up from 12.66 to 31.65 euros a month. If the employment contract allows the employer to pass the tax on, the worker keeps only 601.35 euros. The NWB tax blog warns that retail and restaurants, which rely on mini-jobbers at busy times, will feel the change most.

Experts criticise the reform at the Bundestag hearing

The hearing on 4 November was largely critical, according to the Bundestag's own summary. The Bund der Steuerzahler, the taxpayers' association, estimated the relief at no more than 7 billion euros rather than 10 billion and said the draft disappoints across the board. The economic institute DIW said the working middle class would see practically no relief, and the ZEW institute found that for 98 percent of taxpayers the changes do not fully offset expected inflation. The IMK institute said the tax burden on singles and families could rise until 2028 even if incomes only keep pace with prices, a problem known as kalte Progression, or bracket creep.

The unions want more. The German Trade Union Confederation DGB called the planned basic allowance too low and asked for at least 15,800 euros in 2027. Business groups, by contrast, welcomed the higher Pauschbetrag but said the new top rates mainly hit owners of partnerships and sole proprietorships, for whom income tax is their company tax. Economist Felix Bierbrauer of the University of Cologne doubted that the 47 percent rate would raise extra revenue at all, the Bundestag reported. The Finance Committee must now finish its work before the Bundestag votes and the Bundesrat has its final say.

What the income tax reform 2027 means for expats

If you are employed in Germany, the higher Grundfreibetrag and Pauschbetrag should show up as slightly lower wage tax on your payslips from January 2027, provided the law is passed in time. Most of the effect is automatic, so you do not need to apply for anything. It is still worth checking your first payslip of the new year and keeping receipts for work costs if they could exceed 1,430 euros, for example for a long commute or a home office.

Parents who receive Kindergeld should see 267 euros per child from January without a new application. If you work in a mini-job, look at your contract to see whether your employer is allowed to pass the flat tax on to you, because that decides whether the increase to 5 percent costs you money. If you are planning renovation work at home, keep in mind that the deduction for tradespeople is set to shrink in 2027. Our guide to understanding German taxes explains how wage tax and tax returns work, and our overview of child and family benefits covers who can claim Kindergeld.