German Government Proposes Income Tax Reform for 2027

The German federal government approved a draft bill for the 2027 income tax reform, aiming for a net relief of approximately 5.6 billion euros. According to government statements, the legislative package projects a total relief volume of roughly 10 billion euros, with the full financial impact expected by 2028. Total relief measures of 9.9 billion euros are counterbalanced by additional revenues of 4.3 billion euros. Following its first reading in the Bundestag on October 8, 2026, and subsequent deliberations in the Finance Committee, the legislative process has sparked key policy adjustments and ongoing debates.

At the center of the proposal are adjustments to central tax thresholds, tariff zones, and family benefits. The basic tax-free allowance, set at 12,348 euros in 2026, is slated to rise to 12,564 euros in 2027 and 12,900 euros in 2028. Simultaneously, the second progression zone will be flattened up to a limit of 70,600 euros. The top tax rate of 42 percent will remain in place, but will apply only to taxable income exceeding 70,600 euros.

For very high earners, the draft introduces a wealth tax rate of 45 percent starting at 250,000 euros of taxable annual income, alongside a newly established tier of 47 percent for incomes above 280,000 euros. To alleviate the burden on employees, the standard employee allowance will increase from 1,230 euros to 1,430 euros. The Federal Ministry of Finance estimates that this 200-euro increase will allow roughly 1.3 million taxpayers to forgo submitting additional employee expense forms.

Families are also slated to receive support through adjustments to child benefits and child allowances. Monthly child benefits will increase from 259 euros to 267 euros in 2027 and reach 272 euros in 2028. Meanwhile, child allowances are projected at 10,056 euros per child in 2027 and 10,236 euros in 2028. Federal Finance Minister Lars Klingbeil defended the bill in the Bundestag, emphasizing that the government intends to only partially compensate for bracket creep heading into 2027 while rejecting demands for a comprehensive electricity tax reduction.

Despite targeted relief for smaller and middle incomes, economic and trade associations have voiced significant concerns regarding the legislation. In a submission dated October 7, 2026, the Federation of German Wholesale, Foreign Trade and Services (BGA) and seven other leading associations argued that nine out of ten sole proprietorships would face unfair treatment. The BGA noted that the marginal tax burden for successful sole proprietorships, including the solidarity surcharge and church tax, could exceed 50 percent, whereas it remains below one-third for corporations.

The German Association of Tax Advisors (DStV) welcomed family support measures on October 21, 2026, but criticized the tariff compensation as insufficient, estimating peak tax burdens could reach up to 49.59 percent when the solidarity surcharge is fully applied. Meanwhile, the Bundesrat issued its official stance on October 16, 2026, rejecting proposals to alter certain hourly wage supplements and pushing back against changes to shift-work provisions. The parliamentary committees continue to review the legislation ahead of its implementation.