You pay income tax on all your income in Germany. If you work as an employee, this is the wage tax, which is usually paid directly each month. The amount depends on the tax rate, which increases with your salary - it is "progressive": Those who earn a lot also have to contribute more to the common good. The taxes ultimately payable are based on the principle of performance-related taxation.
Tax rate and progression
We will explain the principle of progression with two examples:
If your taxable income in 2020 is below 9,400 euros, no taxes are due. This amount is the tax-free amount to which every taxpayer is entitled, regardless of whether he or she is a high or low earner. From the first euro that exceeds this tax-free amount, an input tax rate of 12% is due on the amount above it.
If you have an annual income of 9,500 euros in 2020, 9,400 euros of it are tax-free, and on 100 euros you pay tax at a rate of 12% - so that's 12 euros in tax (not including church tax). In this case, your marginal tax rate is 12%, but your average tax rate is still 0%. If your income increases, the tax rate increases. This is called progression.
A second example (without church tax and solidarity surcharge) illustrates this:
You earn 25,000 euros a year as a single person without a child. Up to 9,400 euros the tax office does not charge any tax at all, for the following 100 euros 12%, for the following 100 euros 15%, from the first euro above the amount of 10,300 euros 16% and so on.
The last hundred euros are taxed at a rate of 28% - that is your marginal tax rate. All the different tax rates used to calculate your taxation result in an average tax rate of 15%, your personal tax rate.
What is the progression clause (Progressionsvorbehalt)?
According to §32b of the Income Tax Act (Einkommensteuergesetz), certain income is not taxable but is subject to the so-called progression clause. This means that they affect the progression and increase your tax rate.
Tax-free income includes wage replacement benefits such as unemployment benefit I, parental benefit, maternity benefit, sickness benefit, short-time allowance or insolvency benefit.
We also have an example for you on the progression clause:
You work for six months in 2020 and receive a total wage of 12,000 euros during this period. You are then unemployed and receive a total of 6,000 euros in unemployment benefit I for the second half of the year. Your wage is taxable, but the unemployment benefit is tax-free, but subject to the progression clause.
If you had not received unemployment benefit I, your average tax rate would be 4%. Now, however, your taxable and your tax-free income are added up and amount to a total of 18,000 Euros. This means that your average tax rate is now 10%. This rate is deducted from the taxable part of your income.
Without unemployment benefit I your tax burden would be 428 Euros (without church tax and solidarity surcharge), with unemployment benefit it is 1,219 Euros. If you had to pay regular tax on your entire income, it would be 1,829 euros.
The progression clause thus leads to a higher tax rate and thus also to a higher tax burden. This may result in an additional tax payment.