Summary
Income tax is a direct, progressive tax on the income of natural persons, covering seven income types (e.g., employment, self-employment, business, rentals, capital). Liability is generally unlimited for residents and limited to German-source income for non-residents. Partnerships don’t pay income tax themselves; their partners are taxed individually. Your tax base is the taxable income (zvE) after allowances and deductions (e.g., Werbungskosten, Sonderausgaben, exceptional costs). Returns are filed electronically via ELSTER with the relevant annexes; assessments may set quarterly advance payments.
Contents
What exactly is income tax in Germany?
Income tax in Germany is a tax levied on the income of natural persons (individuals). Its legal basis is the Income Tax Act (EStG). It is a direct tax, meaning the person who is liable for the tax is the same person who ultimately pays it. Income tax is also a joint tax, which means the tax revenue is shared between the federal government, the federal states and the municipalities.
Income tax applies to various types of income, including employment income, self-employment income, capital gains, rental income and other taxable earnings. It is calculated using a progressive tax rate, so higher income is taxed at a higher rate.
What types of income are subject to income tax?
Under German tax law, the following seven types of income are subject to income tax:
- Agriculture and forestry
- Business income
- Self-employment income
- Employment income
- Capital income (if taxed at the standard rate)
- Rental and leasing income
- Other income, such as pensions, private sales and brokerage income
Income exempt from income tax
Some types of income are completely tax-exempt, including:
- Savings bonuses for employees
- Investment allowances
- Housing construction bonuses
- Lottery winnings
- Gifts
- Inheritances
- Income from hobbies that generate a permanent loss
- Mini-job wages below the low-earnings threshold
- Income from volunteer work below the annual allowance
Income subject to progressive taxation
Certain types of income are not taxed directly but increase the tax rate applied to your taxable income. This is known as progression. Income subject to progression includes:
- Unemployment benefits (Type I)
- Insolvency benefits
- Sickness benefits
- Short-time work allowances
These amounts are added to your total income. If the total exceeds the tax-free basic allowance, the excess becomes taxable at the progressive rate.
How is income tax collected in Germany?
Some taxes are deducted directly at source by third parties such as employers or financial institutions.These include:
- Wage tax (deducted by employers)
- Capital gains tax (deducted by financial institutions)
- Interest withholding tax
If an institution has a valid exemption order, no tax is deducted on eligible capital income. Because the tax is withheld before the income reaches you, this system is known as withholding tax.
When you file your income tax return, the tax office checks whether the tax already paid matches your actual liability. Any overpayments are refunded, and any underpayments must be settled.
Who has to pay income tax?
Income tax in Germany applies only to natural persons (individuals). Although companies do not pay income tax directly, the income earned by their owners or partners may still be subject to taxation.
Who is liable to pay income tax in Germany?
Individuals who have their domicile or permanent residence in Germany are subject to unlimited income tax liability. This means that all income, including foreign income, is taxable in Germany.
Who is subject to income tax while living abroad?
Individuals who do not live in Germany but earn German-source income may be subject to limited income tax liability. This applies in cases such as:
- renting out property located in Germany
- working in Germany as an employee
- running a business in Germany
Double taxation is usually avoided through double taxation agreements or by crediting foreign taxes against German income tax.
Do businesses have to pay income tax?
Businesses themselves do not pay income tax. The tax treatment depends on the legal structure of the business.
Partnerships do not pay income tax directly. Instead, the partners are taxed individually.
The partnership files a joint tax return, and the profit or loss is divided according to
ownership shares or the partnership agreement. Each partner then receives a notice showing their share,
and they pay income tax based on their personal financial situation.
Corporations (such as a GmbH or UG) do not pay income tax. As legal entities, they pay
corporation tax. However, the shareholders must pay income tax on their personal income
from the company, including salaries and dividends.
Can trade tax be offset against income tax?
Many businesses must also pay trade tax, which can create a significant burden for sole traders. Under tax rules, part of this trade tax can be credited against income tax.
The credit amounts to 3.8 times the trade tax assessment amount—not the trade tax actually paid. This helps reduce the overall tax burden for individuals operating a business.
Who has to file an income tax return?
Who has to file an income tax return?
Anyone whose income exceeds the basic tax-free allowance is required to file an income tax return. Self-employed individuals and business owners must always file a return, even if they had no income or made a loss.
You must also file a tax return if you:
- receive wage-replacement benefits of more than €410 per month
- earn additional income above €410 per month (e.g., rental income or self-employment)
- receive wages from multiple employers without correct tax withholding
- claim tax allowances
- have losses carried forward from previous years
Who is exempt from filing a tax return?
You generally do not have to file if:
- you are single, employed, and have no income other than your salary
- you are married, employed, and both spouses have no income other than their salaries
In these situations, the employer has already deducted and paid the income tax.
Filing a voluntary tax return
Filing a return voluntarily can be financially beneficial. You may receive a refund if you can claim significant income-related expenses, special expenses or extraordinary burdens that would otherwise not be taken into account.
Learn more about taxation in Germany:
The basic income tax table
The basic income tax table shows the tax burden by income level, both in percentages and in euros. It also includes the solidarity surcharge and, where applicable, church tax.
The table lists values in €100 increments, covering taxable incomes from €9,405 to €270,044. Income up to €9,408 per year is tax-free (2020).
For 2020, the initial tax rate is 14%, and the top rate of 42% applies from a taxable income of €57,052. A 5.5% solidarity surcharge may also apply, and church tax of 8% or 9% is added for taxpayers who are church members.
Extract from the basic income tax table 2021
| Income | €9,744.00 | €10,000.00 | €40,000.00 | €129,400.00 |
| Tax | €0.00 | €36.00 | €8,333.00 | €45,211.00 |
| Average rate | 0% | 1% | 21% | 35% |
| Marginal tax rate | 0% | 14% | 35% | 42% |
| Solidarity surcharge | €0.00 | €0.00 | €0 | €2,486.61 |
| Church tax 9% | €0.00 | €3.24 | €749.97 | €4,068.99 |
| Total tax | €0.00 | €39.24 | €9,082.97 | €51,766.901 |
| Average rate | 0% | 1% | 23% | 40% |
| Marginal tax rate | 0% | 15% | 37% | 48% |
The values of this basic table result from the income tax scale as per § 32 EStG.
The income tax rate 2021 as per § 32 EStG
The standard income tax rate is based on taxable income. It is divided into five tariff zones:
| Tariff zone 1 | zero zone | Up to €9,744 (basic allowance) | 0 |
| Tariff zone 2 | Progression zone 1 | €9,745 to €14,753 | (995.21 * y + 1,400) * y |
| Tariff zone 3 | Progression zone 2 | €14,754 up to €57,918 | (208.85 * z + 2,397) * z + 950.96 |
| Tariff zone 4 | Proportional zone 1 | €57,919 up to €274,612 | 0.42 * x – 9,136.63 |
| Tariff zone 5 | Proportional zone 2 | over €274,613 | 0.45 · x – 17,374.99 |
y = taxable income
In progression zone 1, the rate increases most sharply, and in progression zone 2 to a lesser extent. It then remains constant at the top rate of 42%.
How can I reduce my income tax?
How can I reduce my income tax?
There are several effective ways to reduce your income tax burden. These include personal allowances, special rules for families and reliefs for specific life situations.
Basic allowance
Every taxpayer benefits from a basic tax-free allowance. In 2021, this amount is €9,744 for individuals. Income below this threshold is not taxed.
Spousal income splitting
If married partners have significantly different incomes, income splitting can lead to a much lower overall tax rate.
Both incomes are combined and divided by two before applying the tax rate. Married couples who file jointly benefit from a doubled allowance of €19,488.
Tax relief for pensions
Each state pension includes a personal tax-free portion. Pensioners are also entitled to a standard allowance for income-related expenses of €102.
Child allowances
Parents can reduce their tax burden through child allowances. In 2021, the allowance per parent per child is €5,460. In addition, a combined care and education allowance of €2,928 applies, bringing the total to €8,388 in most cases.
These allowances are only applied if they provide more tax savings than the monthly child benefit (currently €219 for the first and second child). The tax office automatically determines which option is more favourable. There is also a vocational training allowance of €924.
Relief for single parents
Single parents can claim a relief amount of €4,008 for the first child, plus €240 for each additional child living in their household.
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Deduction of work-related expenses
Employees automatically receive a work-related expenses allowance of €1,000. If your actual work-related costs exceed this amount, you can claim the higher total by providing documentation.
Work-related expenses include everything you spend in connection with your job. Examples include work equipment, train tickets, costs for a second degree or vocational training, professional clothing, job application costs, job-related relocation, dual households, and commuting expenses.
For travel to work, you can deduct €0.30 per kilometre (one way only). This allowance is usually capped at
€4,500 per year, but if you commute by car, higher amounts may be accepted if proven.
Deducting special expenses
Special expenses are private costs that the tax office allows you to deduct. These include:
- Tax adviser or tax software costs
- Private health insurance contributions (fully deductible if you are an employee receiving employer contributions)
- Up to €2,800 in private health insurance contributions for self-employed individuals
- Liability, accident and other insurance premiums
- Donations, school fees and similar expenses
Exceptional costs
Exceptional costs refer to unavoidable expenses that exceed what is considered reasonable for a taxpayer. These include:
- Medical expenses not covered by insurance
- Maintenance payments to dependents
Tax reduction through retained profits
If you run a business and leave profits in the company rather than withdrawing them, you can benefit from a reduced income tax rate of 28.25% (plus applicable surcharges). This preferential rate applies only to retained profits.
If the retained profits are withdrawn in a later year, they are taxed at a separate rate of 25% plus surcharges. This approach is often advantageous if the withdrawal occurs several years later. It is advisable to have this reviewed by a tax professional.
Learn here what else is tax deductable in Germany.
How to calculate your income tax
Your income tax is based on your taxable income. You can calculate this by combining all sources of income and then applying various deductions and allowances. The process generally follows these steps:
- Add together all types of income
- Subtract relief amounts (e.g., for age or single parents)
- Subtract special income allowances for certain activities
- Add any additional taxable amounts from multiple employment relationships
- Total income
- Add any refund surpluses
- Subtract loss carryforwards
- Subtract special expenses
- Subtract exceptional costs
- Subtract property-related tax allowances
- Add attributable foreign income
- Income
- Subtract child allowances
- Subtract hardship compensation
- Taxable income (the amount on which your tax rate is applied)
You can then use the Federal Ministry of Finance’s income tax calculator to estimate your tax liability. Simply enter your taxable income and the calculator will determine the expected tax amount.
How to file a tax return
Where do I file my income tax return?
The tax return is submitted via the electronic portal ELSTER. Your income tax return must be filed with the tax office responsible for your place of residence. This office handles the assessment and collection of your income tax.
When do I have to file my income tax return?
An income tax return is always submitted for a calendar year. Since 2019, taxpayers have been granted additional time to file. If you use a tax adviser or an income tax assistance association, the deadline is usually extended until 31 December of the following year. You can also request a deadline extension if needed. All income tax returns must be submitted electronically through the official online portal.
Once submitted, the tax office processes returns in chronological order. Processing times vary, but most taxpayers receive their tax assessment within a few weeks. You can also access your assessment online via your tax account.
Who does not have to file a tax return?
You are not required to file a tax return if you have no income. In that case, there is no obligation to submit a declaration.
Annexes to the income tax return
Depending on your individual situation, your income tax return must include various annexes and supporting documents. The main form, called the basic return form, contains your personal details as well as information on
special expenses and exceptional costs. You must also upload any required supporting documents.
The most common annexes and documents include:
- Annex K: Required if you are a taxpayer with children
- Annex G: Used if you earned income from commercial activities (including negative income)
- Annex S: Required if you generated self-employment income
- Supporting documents such as donation receipts, invoices or bank statements—submitted as needed
- Annual financial statement or a profit and loss statement (EÜR): required for self-employed individuals and business owners
The income tax notice
Your income tax notice shows whether you owe additional income tax or are entitled to a tax refund. Along with this assessment, the tax office also provides a notice detailing your quarterly advance income tax payments for the current or upcoming year.
Tip: Tax assessments are not always accurate. Review your notice carefully or have it checked by a tax adviser. If you disagree with the result, you can file an appeal within one month of receiving the assessment.
Advance income tax payment
Although income tax is usually due after the end of the tax year, the tax office may require quarterly advance payments. This helps avoid large arrears and ensures timely collection. Advance payments are calculated based on your previous year’s income, and one quarter of that amount is deducted ten days after the end of each quarter.
Can I reduce advance tax payments?
Many entrepreneurs experience fluctuating income. If your current revenue or order situation shows a clear decrease compared to the previous year, you can apply to the tax office to reduce your advance tax payments.
Conclusion
Reduce your bill by leveraging the basic allowance, spousal splitting, child allowances, and documented work-related expenses. Keep partnership allocations, loss carryforwards, and special regimes (e.g., retained-profit taxation) in view. File on time via ELSTER, check the tax notice, and adjust advance payments if income drops. For complex cases—mixed income, cross-border issues, or high deductions—coordinate early with a tax adviser to optimise outcomes.
