In Germany, you pay income tax on your earnings. If you're employed, this is called wage tax, which is usually deducted directly from your salary. The amount of tax depends on the so-called progressive tax rate: the more you earn, the higher your tax rate. This is known as tax progression.
📌 Quick & Easy
- Income tax increases with income (progression)
- The tax rate rises step by step depending on income level
- Certain tax-free benefits still affect your tax rate
- These are called income subject to the progression clause
🚀 Your Guide
- What is progression?
- Examples of tax progression
- What does the progression clause mean?
- Example of the progression clause
What is progression?
The German tax system is progressive. This means that those who earn more not only pay more in total, but also a higher percentage in taxes. The tax rate increases with income. The basis for this is the so-called basic tax-free allowance. You only pay taxes above a certain annual income.
Examples of tax progression
Example 1:
You have a taxable income of €9,500 in 2020. The basic allowance is €9,408. For the €100 above that, you pay 12% in taxes – that’s €12. Your marginal tax rate is 12%, but your average tax rate is 0%.
💡 What does that mean?
- Marginal tax rate: The rate applied to the last euro of your income.
- Average tax rate: Your total tax amount divided by your income – i.e., the percentage you pay on average.
Example 2:
You earn €25,000 a year. You pay no taxes on the first €9,408. After that, the tax rate increases in steps. On the last €100, you pay 28%. That’s your marginal tax rate. On average, your overall tax rate is about 15%.
What does the progression clause mean?
Some types of income (Wage replacement benefits) are tax-free but still affect your tax rate. These are subject to the progression clause. They include, for example:
- Unemployment benefit I (ALG I)
- Parental allowance
- Maternity allowance
- Sickness benefit
- Short-time work allowance
- Insolvency payments
These benefits are not taxed directly. However, they increase the tax rate on your other taxable income.
Example of the progression clause
You earn €12,000 in wages during the first six months of 2020. Then you receive €6,000 in unemployment benefit I for the remaining six months.
- Without the unemployment benefit, your average tax rate would be 4%.
- With the unemployment benefit, it increases to 10%.
This higher rate is then applied to your €12,000 of taxable income. As a result, your tax burden increases from €428 to €1,219.
➡ Although the unemployment benefit is tax-free, you end up paying more tax. The progression clause can therefore lead to a tax back payment.
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