Major Tax Reforms Take Effect in Germany in 2025

Significant Income Tax Changes for 2025

From January 1, 2025, Germany has introduced widespread tax updates affecting both individuals and businesses. These changes influence tax brackets, deductions, reporting obligations, and digital invoicing. While this article offers a comprehensive overview, it is important to note that WeLiveIn.de is not a tax advisor. Some inaccuracies may be present, and individual circumstances should always be reviewed with a certified tax professional.

One of the most impactful updates is the rise in the basic personal tax-free allowance, known as the “Grundfreibetrag.” It has increased to €12,096, up from €11,784 in 2024. This adjustment aims to protect the minimum living standard from taxation and offset the effects of inflation. The same principle applies to the adjusted tax brackets, which have been shifted slightly upward to prevent so-called “cold progression.” The 42% income tax rate now applies from €68,481, while the 45% top tax rate remains for annual incomes above €277,826. For married couples, these thresholds are doubled when filing jointly.

Increases in Child Benefits and Allowances

Families in Germany benefit from several new measures in 2025. The child allowance (“Kinderfreibetrag”) has been raised to €3,336 per parent, while the additional allowance for care, education, or training needs remains at €1,464. Combined, parents can now claim a total tax-free amount of €9,600 per child. In addition, the monthly child benefit payment has increased by €5, reaching €255 per child.

To support working parents, the limit for deductible childcare costs has risen. Now, 80 percent of eligible expenses—up to €4,800 per child—can be declared as special expenses. This adjustment is designed to ease the financial burden on families with young children or children with disabilities.

New Rules for Payroll and Tax Class Applications

A number of procedural changes affect how employees and employers manage wage tax in 2025. Applications for income tax reductions must now be submitted every two years. Additionally, changing your tax class—for instance, after marriage or separation—is no longer automatic and must be formally requested from your local tax office.

The previously employer-applied “one-fifth rule” for severance payments and long-term compensation will no longer be included in payroll. Instead, employees must apply this relief themselves in their annual income tax return. This may initially result in over-withholding of tax during the year, but refunds are possible upon filing.

Small Business Tax Reform and Digital Invoicing

The small business scheme (“Kleinunternehmerregelung”) has been modernized. From 2025, the turnover thresholds are now set at €25,000 for the previous year and €100,000 for the current year. Unlike the previous gross limits, these are calculated on a net basis. If a small business exceeds these thresholds mid-year, the VAT exemption ends immediately, and VAT must be charged from that point forward.

An important simplification comes in the form of reduced reporting requirements: small businesses are now exempt from submitting an annual VAT return. However, those engaged in cross-border trade must comply with new quarterly reporting obligations and register for a “Kleinunternehmer-ID” when applying the small business scheme in another EU country.

In a major step toward digitalization, all B2B recipients must be able to receive structured electronic invoices, such as XRechnung, starting in 2025. While small businesses are temporarily exempt from issuing such e-invoices until 2028, they still need to receive them. This change is part of Germany’s broader effort to streamline EU-wide VAT practices and reduce administrative overhead.

Broader Measures for Individuals and Corporations

Several less-visible but important tax adjustments are now in force. The solidarity surcharge (“Solidaritätszuschlag”) exemption limit has increased to €39,900, further relieving middle-income earners. For those who still pay, the “mitigation zone” has also been expanded to smooth the transition into the full surcharge rate.

Home brewers and hobby brewers can now produce up to 5 hectoliters of beer annually without paying excise tax, an increase from the previous 2 hectoliters. In the area of property taxation, the updated property tax law now fully applies from 2025. Municipalities have adopted varying models, which can influence how much property owners will pay based on local regulations and values.

Photovoltaic systems installed from 2025 onward benefit from updated tax exemptions. Installations of up to 30 kW per unit across all building types are now tax-free, provided the total per taxpayer does not exceed 100 kW. This exemption applies whether the installation is new, expanded, or replaced.

Reporting, Bookkeeping, and Corporate Tax Updates

The retention period for accounting documents has been reduced from ten to eight years, easing the administrative burden for companies. In corporate taxation, updates include extended electronic reporting duties for balance sheets, more flexible rules for restructuring and mergers, and refined provisions on cross-border operations.

Germany has also introduced broader exemptions for debt restructuring income and capital losses. This includes clarifying the treatment of bonus health insurance payments, now exempt up to €150 per year and per person. In agricultural taxation, simplified schemes and rates have been adjusted to match EU compliance standards and market conditions.

For corporate groups and partnerships, numerous amendments aim to streamline tax-neutral transfers, clarify the use of book values, and align reporting deadlines with electronic declaration requirements. These measures affect everything from intra-group share transfers to restructurings involving EU member states.