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Overview of Germany’s Reform Package
The new coalition government in Germany, comprising CDU/CSU and SPD, has reached a comprehensive agreement on a wide-ranging reform package aimed at boosting the economy, alleviating tax burdens for millions, and modernizing social welfare and labor policies. This reform bundle includes significant tax relief measures, changes to unemployment benefits, adjustments to pension schemes, and updates to labor regulations such as sick leave procedures [Source 1], [Source 2].
Key Tax Relief Measures and Economic Impact
The coalition’s tax reform is centered on reducing the income tax burden, particularly for low and middle-income earners. Notably, the basic tax allowance (Grundfreibetrag), child tax allowances, and child benefits have all been raised. Additionally, the employee lump-sum deduction (Arbeitnehmerpauschbetrag) will be increased, and the progression in income tax rates will be smoothed. These changes are expected to provide a tax relief of up to 600 euros annually for a typical working family with two children and a taxable income of 60,000 euros. The tax rate of 45 percent will now apply to taxable incomes starting at 250,000 euros, with a 47 percent bracket for incomes above 280,000 euros. The government has also pledged compensation to states and municipalities for resulting revenue losses beyond constitutionally required adjustments [Source 1], [Source 5].
Social Benefits and Labor Regulations Reforms
On the social welfare front, the reform package introduces a new basic income support system that will replace the existing Bürgergeld, introducing stricter participation requirements for beneficiaries. Missing appointments with job centers can now lead to immediate 30 percent benefit reductions. From 2026, the so-called “Aktivrente” (active pension) will enable working retirees to earn an additional 2,000 euros monthly tax-free, encouraging continued workforce participation beyond the standard retirement age. The reform also abolishes the telephonic sick note system, requiring direct medical certification for employee sick leave [Source 4], [Source 7], [Source 2].
Implications for Expats, International Students, and Foreign Workers
For expats, international students, and foreign workers living in Germany, these reforms carry practical implications. Taxpayers with low to mid-range incomes can expect reduced income tax burdens, which may increase disposable income. Families with children benefit from higher child-related tax allowances and benefits, helping with cost of living adjustments. The stricter rules on social benefits may affect foreign nationals receiving unemployment or social support, emphasizing the importance of compliance with job center obligations to avoid sanctions. The elimination of telephonic sick notes means foreign workers must obtain physical medical documentation to justify absences, which could require adjustments in employer-employee communication. Additionally, the new pension incentives for working retirees may be relevant for older expats planning to remain employed after reaching retirement age. Overall, these reforms underscore government intentions to strengthen employment incentives and streamline social welfare administration [Source 1], [Source 4].
Expats should stay informed of these changes as they may affect tax filings, social benefits eligibility, and workplace procedures. Employers and employees alike will need to adapt to new documentation requirements and benefit regulations as these reforms are implemented. For further details, the original German-language overview is available at https://www.tagesschau.de/inland/innenpolitik/reformen-koalitionsausschuss-102.html [Source 1].
