Basic Allowance 2025 in Germany – what do you need to know about it?

From the first of January 2025, the basic tax-free allowance and the employee lump sum deduction applicable in Germany will be retrospectively increased as part of the Tax Relief Act. What this means for employers and employees and what you need to pay attention to on your payroll, you will learn in today’s article.

Basic tax-free allowance and employee lump sum deduction – what is that?

The basic tax-free allowance refers to the maximum amount of a person’s income up to which no income tax is levied. Only income that exceeds the basic tax-free allowance is taxable in this case. The employee lump sum deduction, on the other hand, is an amount that is automatically deducted from the income of all employees. If they incur higher and particularly individual advertising costs (e.g., commuter or training costs), they have the option to deduct these as part of their annual tax return. Both the basic tax-free allowance and the employee lump sum deduction are included in the payroll tax tables, on the basis of which the employer deducts the monthly payroll tax. Due to the retrospective increase in both amounts, the monthly payroll tax burden is automatically reduced. How high are the increased amounts currently?

• Employee lump sum deduction – increase from the previous €1,230.
  ● Tax savings through retrospective increase of the employee lump sum deduction – maximum amount up to the employee’s personal tax rate.
  ● Basic tax-free allowance for singles – €12,096
  ● Basic tax-free allowance for married couples – €24,192.

German taxpayers are already pleased with the retrospective increase of the basic tax-free allowance, which allows them a tax saving of around €100 (singles) or €200 (married couples) per year.

Basic tax-free allowance 2025 – effects on payrolls after retrospective increase

The gradual increase of the basic tax-free allowance and employee lump sum deduction from 2023 is part of the statutory measures for tax relief – particularly in response to increased inflation and living costs. What must employers, who have already been preparing payrolls for 2022 for several months, now do so that their employees can benefit from the retrospective tax advantage? There are two options:

• the adjustment of payroll tax deduction,
  ● Waiver of the correction.

The first case is based on § 41c para. 1 sentence 1 no. 2 EStG, according to which the employer is entitled to refund the already deducted payroll tax with the next payment. He can also retrospectively collect it on wages not yet deducted if he finds that this was not done in accordance with regulations before. The correction consists in reimbursing the employee for the amounts that have been excessively deducted. Waiver of the correction, on the other hand, means that the employee has to reclaim the excessively deducted tax from the tax office through their tax return. However, this could take much longer, at least until spring 2023.

Tax relief 2025 – retrospective adjustments

According to the new regulation, the employer can also be obligated to make retrospective adjustments. This change is economically sensible at a time when payroll accounting is conducted automatically and the software of this accounting provides and enables retrospective calculations. Since most computer programs have this capability, payroll tax correction can be considered obligatory for most employers. The exception is when the employment relationship has ended. If a payroll tax certificate has been sent to an employee who has left their job, a correction is not allowed. If the employer does not make a correction, you receive the previously missed tax benefit retrospectively as part of a personal income tax return. In Germany, the Taxando tax accounting app helps in calculating the final amount of the retrospective tax refund for the employee lump sum deduction or the basic tax-free allowance.

Basic tax-free allowance 2025 – can you apply for an income tax refund yourself?

To answer the above question: You can, if the employer does not correct previous payrolls. At the tax office, you can apply for a refund of the previously overpaid tax. The rules are regulated in the Income Tax Act; they are also found in the payroll tax guidelines. The application for an income tax refund can be made as part of the regular tax return – usually by July 31 of the following year.