Taxation in germany

Taxation is one of the most criticized matters in Germany. Germans themselves assume that it should be one of the most complex systems in the world. The complexity of the German tax system is a result of constant modifications prompted by corporate pressure groups.

Since tax regulations are frequently modified and hard to understand, people rely on tax advisors, as they do in all industrial countries.

Individual tax rates in Germany vary with the income, that is the tax rates are progressive as they are in all industrialized countries of the West. On salaries and wages, income taxes are paid as you earn. Income taxes had been by 2005 and the maximum marginal rate was 42% in 2005.

By law, employees pay ‘as they earn’ a compulsory fee for their individual social security of approximately 20-21% of what they earn. The same amount is paid by the employer into the bargain. This is a continual contentious political issue in Germany.

In Germany, for tax purposes you can either be a resident or a non-resident. If you have been present in Germany for over 183 days in the last year, you are generally considered to be a resident for tax purposes. If you are a non-resident for tax purposes (e.g. short term contractor), you will generally still be liable to pay tax on German-sourced income. The rate may vary; tax relief opportunities and double taxation agreements may alter it.

There are 6 tax classes that you may fall into:

1. Those single or separated, but not falling into categories 2 or 3.

2. Single and separated, with a child, entitling them to children’s allowances.

3. Married, or widowed employees who are within the first year of a spouse’s death.

4. Married employees both receiving income.

5. Married persons who would normally fall into category 4, but whose spouse is in tax class 3.

6. Employees who receive income from other employment on one or more different tax cards.

On top of this, you may either be a salaried employee (as most people are) or a free-lance (a free professional, e.g. doctors, architects). For salaried employees, the employer withholds tax and social insurance.

Wages are taxed in different progressive ranges. Solidarity tax is levied for the purpose of supporting the economy of the former GDP and is calculated at 5.5% of your wage tax.

Church tax is only relevant if you listed a religion on your tax form. It will be either 8 or 9% of your wage tax. But it is difficult to stop paying church tax once you have begun.

Regular employees are liable for the following individual social insurances: health insurance, pension insurance, unemployment insurance and health/nursing care insurance.

Health insurance is 6-7% of taxable income (before tax, minus deduction). Pension insurance is 9.65%, unemployment insurance is 3.25% and health care insurance is 0.85% of taxable income. In total, this is around 21% of your income. These payments are partly subject to a tax relief or tax deductions. Employers have to pay the same amounts that go into the social security of the individual employee.

German pensions are currently not taxable at retirement age. If the earnings of an employee are above a certain limit (about 46,800 euros in 2005), he or she can opt for a private health insurance policy, which can be considerably cheaper, especially when the employee is young and unmarried. The national health system is a family insurance, covering spouse and children, while private health insurance policies cover individual risks only.

A free-lance professional is not obliged to take out social insurance policies.

It might be wise to take up some other insurance such as permanent disability, life insurance, or pension insurance.

Depending on your type of work, you may not be classed exactly as a free-lance, and you will be subject to a trade tax, which is a tax calculated with a region-dependant multiplier on your existing tax bill. This varies from 10% to 16% of your existing tax bill, depending on where you are.