Germany's Income Tax Reform: What Changes From 2027 and Who It Affects

Why this is in the news now

On 2 September 2026, the German federal cabinet, led by Finance Minister Lars Klingbeil (SPD), approved a draft income tax law meant to take effect gradually from 1 January 2027 and reach full strength in 2028, according to ZDFheute. The bill has become one of the most-discussed fiscal measures of the year because it affects the pay slip of almost every employee, pensioner and family in Germany, and because it has triggered a dispute inside the governing coalition over whether the relief goes far enough, ZDFheute and WirtschaftsWoche reported.

The draft still needs approval from the Bundestag and Bundesrat before it can become law. Coalition partner CDU/CSU has already pushed for further changes during the parliamentary process, WirtschaftsWoche reported.

What the reform actually changes

The basic tax-free allowance (Grundfreibetrag) is set to rise from €12,348 in 2026 to €12,564 in 2027 and €12,900 in 2028 per taxpayer, according to ZDFheute's report on the cabinet draft. The flat-rate employee deduction (Arbeitnehmerpauschbetrag) is to go up from €1,230 to €1,430, and monthly child benefit (Kindergeld) is scheduled to rise from €259 to €267 in 2027 and €272 by 2028 per child, ZDFheute and The Local reported.

On the financing side, the government plans to lower the income threshold at which the 45% higher-rate tax applies, from €277,826 to €250,000 of taxable income, and to introduce a new 47% rate for income above €280,000, according to ZDFheute and WirtschaftsWoche.

WirtschaftsWoche reported that the package totals about €9.9 billion in gross relief, partly offset by roughly €4.3 billion in additional revenue from the measures above, leaving net relief of about €5.6 billion. For a family with two children and a combined taxable income of around €60,000, the government estimates savings of more than €600 a year once the reform is fully phased in by 2028, according to The Local and ZDFheute.

The unresolved dispute over 'cold progression'

Much of the political argument centres on "kalte Progression," or cold progression: when a pay rise merely keeps pace with inflation, it can still push part of a salary into a higher tax bracket, so the tax bill rises even though real purchasing power has not. ZDFheute reported that an estimated 35.7 million people in Germany were affected by cold progression in 2025, with an average loss of €221 per person, at a time when annual inflation stood at 2.9% in August 2026.

The reform only partially compensates for this: the 42% threshold moves up by roughly €700 to €70,600, well short of fully neutralising several years of inflation, according to Legal Tribune Online. IW Köln economist Tobias Hentze said the planned measures would not be enough to fully offset the additional burden caused by cold progression, according to ZDFheute, and pointed to automatic inflation-indexing systems used in Austria and Belgium as an alternative approach.

ZDFheute also cited tax expert Frank Hechtner warning that rising social-insurance contributions combined with inflation could, for some taxpayers, offset the planned tax savings entirely, potentially leaving them with less net income in 2027 than in 2026.

Who gains and who pays more

• Low- and middle-income earners and families with children benefit most from the higher basic allowance and child benefit, according to ZDFheute and The Local.
• Employees generally gain from the higher flat-rate deduction, ZDFheute reported.
• Taxpayers with taxable income between €250,000 and €277,826 move into the 45% bracket earlier than before, since that threshold is being lowered, per ZDFheute and WirtschaftsWoche.
• Earners above €280,000 face a newly created 47% rate, according to the same reports.
• Households that hire tradespeople see the Handwerkerbonus deduction shrink from 20% (max €1,200/year) to 15% (max €900/year), Legal Tribune Online reported.
• Employers of mini-jobbers face a higher flat-rate tax, rising from 2% to 5%, according to Legal Tribune Online and WirtschaftsWoche.

Within the coalition, CDU politician Fritz Güntzler called for further changes to address bracket creep caused by inflation, WirtschaftsWoche reported. Legal Tribune Online reported that Economics Minister Katharina Reiche (CDU) said the relief did not go far enough, and that trade associations and the German Taxpayers' Association voiced discomfort with the plan's scope. Finance Minister Klingbeil defended the design, saying, according to WirtschaftsWoche, that having higher earners contribute more allows the government to relieve people in the middle of the income scale, an approach he described as fair.

The Local reported that the SPD had sought a higher top tax rate and changes to inheritance tax within the coalition negotiations, proposals that the CDU/CSU rejected, resulting in what The Local described as a more modest package than some in the coalition initially wanted.