Pension Contributions Fully Deductible from 2023

As announced by Federal Finance Minister Christian Lindner, pension contributions will be fully tax-deductible from 2023. These will be deductible as so-called special expenses. The purpose of the change introduced by the federal government is to avoid so-called “double taxation” of pensions from basic security (especially for future cohorts of retirees). Double taxation occurs when the so-called pension allowance is less than the sum of pension contributions paid from taxed income. The plan to deduct pension contributions from tax beginning in 2023 is already anchored in the coalition agreement, so resistance from the other governing parties is not expected.

Deductible pension contributions – what does this change mean in practice?

German pension contributions will be deductible more quickly than the previous phased plan envisioned. The Retirement Income Act (AltEinkG) of 2005 decided on a gradual transition to deferred taxation.This means that the pension contributions are tax-free and the later pension incomes are taxed. According to the original plan, full tax deductibility of pension contributions should not have been possible until 2025.

Tax-deductible pension contributions – Slower growth of the tax share on pensions

A coalition of street movements has, according to the Federal Ministry of Finance, agreed that the share of tax-deductible pension contributionsshould increase much less sharply from 2023 than originally planned. The details are not known to us, but it is planned that the full taxation of annual gross pensions should take place in 2040 (according to the Pension Act).

Taxation of pension contributions – how does that work currently?

Currentlythe taxable portion of your pension depends on the year you retired. Those who retired in 2005 and earlier have a tax allowance of fifty percent for the rest of their lives, which practically extends over the entire pension period. For new retirees, the allowance is reduced every year (from 2005).The tax burden gradually increases:

• by two percentage points each in the years 2005-2020,
• by one percentage point each in the years 2021-2040.

Those who retire in 2040 will have to pay the full tax on their entire pension.

Tax refund – voluntary pension contributions

The change in taxation of pensions from the basic pension insurance in 2005 refers to:

• pensions from the statutory pension insurance,
• agricultural pension insurance,
• company pensions,
• basic pension contracts.

The Pension Act gradually transforms the previous taxation into a taxation during a long transition phase. This means that pension contributions can be claimed for tax purposes during working life. The pensions resulting from these expenditures will be fully considered when paid out. A special app can help calculate the amount of your tax refund in Germany. For example, you can try the Germantax return programTaxando for free.