Changes in 2023
Taxes, Insurance, Pension
Germany has changed some rules in 2023 that will make EVERYONE earn thousands of euros more than in 2022 🥳. So read this article carefully to participate in that.
- Germany increases social security contributions for public health & care insurance, public pension, and unemployment insurance.
- The tax-free allowance for investment income in Germany will increase from 801€ in 2022 to 1.000€ in 2023.
- The amount of money you can earn each year without paying income tax will increase from approx. 10.300€ to 10.900€.
- The maximum home office allowance increases from 5€ per day for 120 days to 6€ per day up to 210 days.
- The child benefits increase to 250€/month per child. This is an increase of 744€ on a yearly base.
- The tax-deductible retirement savings increase to the full 25.639€ instead of just 94% of it, which amounts to an increase of 1.539€.
- The German government allows employers to grant an inflation bonus of up to 3.000€ over the year 2023 – 2024 to employees.
- The depreciation allowance for newly constructed properties for real estate investors increases from 2% to 3% of the property value.
- There are some additional changes that may be less relevant to PerFinEx readers, but that we’ll mention briefly.
Introduction: Changes in 2023
Happy new year! And the German government has a New Year’s gift for us. The government made some rule changes for 2023 that will allow us to pay thousands of euros less tax than in 2022! Some of the highlights include:
- Increase in tax-free earnings (from our salary and investments).
- We are able to receive an inflation bonus of up to 3.000€ from our employer.
- Increase in child benefit.
- Increase in the tax benefits of a home office.
- Sadly, our social security contributions will increase this year.
Changes in Social Security
Let’s deal with the bad news first – the changes in social security. The maximum gross salary on which public health and care insurance is charged increased from 58.050€ to 59.850€. This means, if you earn more than that amount, more of your salary will be taxable. The additional public health insurance contribution will also increase from an average of 1,3% in 2022, to about 1,6% this year. You will need to check with your public health insurance to find out the exact rate you will pay.
However, if this rate has increased, you do have a right to switch to a different public health insurance, or private health insurance if your gross salary is above 66.600€. At least the rates for health and care insurance will remain unchanged at 14,6% for health, and 3,4% for care. The net result of all this is that, if your salary is above 60.000€, payments have increased by 466€ for public health insurance, and 61€ for public care insurance. But if your salary is below 58.000€, you’ll pay only a little more in 2023, because of the increased additional contribution rate. However, this increase is split 50/50 between employer and employee.
Next, something very similar happened for public pensions and unemployment insurance, although the numbers involved are different. The maximum salary you pay contributions on for both of these is 87.600€, up from 84.600€ last year. The public pension contribution rate remained the same at 18,6%, but the unemployment insurance rate has risen slightly this year, to 2,6%, from 2,4% previously. So, if you earn more than 87.600€ gross, the total payments due are 588€ more for the public pension and 242€ more in unemployment insurance. Again, this would be split equally with our employer.
The net result of all these changes in social security is that you could be paying as much as 666€ more than last year out of your own pocket – 50% of the total increased cost of 1.333€. Now let’s see what the rest of the tax changes have to offer to see if you can dig yourself out of this 666€ hole!
Changes in Investment profits
The first change that will help you cut your tax liability is an increase in the tax-free allowance for investment income from 801€ to 1.000€. It is important to note that this applies to capital gains, dividends, and interest income, and is per person.
So if your children hold investments, this applies to them as well! It is worth saying that this applies only to investments in Germany, with German banks that have a Freistellungsauftrag.
Changes in tax-free earnings
Another allowance that has increased is the Grundfreibetrag – the amount of money you can earn each year without paying income tax – this has increased from about 10.300€ in 2022 to 10.900€ this year, in taxable income per person.
The bands of the other income tax rates have been increased as well so that someone with 70.000€ taxable income would pay about 782€ less in income tax than last year.
It is worth emphasizing that this relates to taxable income, not gross salary – taxable income is what is left after we have deducted the allowable expenses from your gross salary – it is calculated each year when you file your tax declaration.
Changes in home office allowances
It seems the German government is becoming increasingly comfortable with home working. Tax-deductible allowances for home office costs have been increased substantially.
Last year, you could claim a maximum of 5€ per day for 120 days (600€ in total), this year that has increased to 6€, for up to 210 days (1.260€ total). If you work from home a lot, that is 660€ you can claim on your tax declaration to reduce your taxable income.
Changes in child benefits
2023 saw the largest increase in Kindergeld – child benefits – since 1996. In 2022, you could receive 219€ per month for the first two children, 225€ for the third, and 250€ per month for each additional child. Now, parents can receive €250 per month for every child. So a family with two children will receive 744€ more child benefits this year than last.
Alternatively, depending on your taxable income, you could receive Kinderfreibetrag – child allowance. This increased from 2.730€ to 3.012€ per child this year. If you don’t know whether Kindergeld or Kinderfreibetrag would be more beneficial, Finanzamt will check automatically when you file your tax declaration.
Changes in retirement savings
The German government wants to make sure you make proper provision for our retirement. To make sure you do this, they let you deduct retirement savings from your taxable income. Last year, you could deduct 94% of 25.639€. In 2023, you can deduct up to the full 25.639€ – an increase of 1.539€.
Again, you can do this via your tax declaration. If you want to understand more about pensions in Germany and how you can be making the best use of your contributions, you can book a free meeting with us at perfinex.de/meeting to discuss it.
To reflect the very high level of inflation currently, the German government allows employers to grant a bonus of up to 3.000€ over the next two years (2023-24) to employees.
This amount is free of both income tax and social security contributions to both employers and employees and must be paid on top of your regular salary and bonuses.
Changes for real estate investors
For real estate investors, the best tax change this year is the increase in the depreciation allowance for newly constructed properties that will be built in 2023 and later, from 2% to 3% of the property value. Depreciation allowances are used to decrease your taxable income.
This means an increase in the allowance from 2.000€ to 3.000€ per 100.000€ of property value. And there is no upper limit on these allowances – you could deduct millions of euros if you have that much property! It is worth noting, however, that this benefit does not apply to homeowners.
Other changes in 2023 in Germany
There are some additional changes that may be less relevant to PerFinEx readers, but that we’ll mention briefly.
- 49€ ticket expected in April to replace last year’s popular 9€ ticket.
- VAT on gas is cut from 19% to just 7%.
- Wohngeld (housing benefit) has increased, and more low-income households can apply for it.
- Unemployment benefit (‘Hartz4’) is now called Bürgergeld and benefit levels increased as well
- Retirees can now earn more money without reducing their public pension.
- CO2-Umlage, which was previously paid solely by tenants is now split with landlords, where the proportion paid by the landlord is higher the worse the condition of the property.
So, there are several thousand euros in potential benefits for you to start 2023 the right way.