Wage Tax & Contributions for Employees
Understanding your Gross/Net Salary
As we’ve already mentioned, if you are moving to Berlin from another big city the likelihood is that your salary here will be notably lower than it was there. That is simply because the cost of living in Berlin is lower, so before you start worrying about your precious disposable income, you should still have enough for the brunches, cocktails, clothes and other things you probably shouldn’t spend it on anyway.
That’s not the only surprise in store. It’s important to know that Germans LOVE tax. Well rather the people themselves don’t love it, but the state loves to tax them, and that means you too now that you’ve chosen to live and work here.
There is a list of things that are deducted from your paycheque before you see any cash, so beware that the amount agreed in your contract, your gross (brutto) salary, will look a lot different to the amount that arrives into your bank account with all the deductions taken out, your netto salary.
Being aware of these will help to make sure that you negotiate yourself a salary that isn’t going to leave you searching sofas for small change at the end of the month. Let us break down the basics for you.
Wage Tax in Germany
Income tax payable on your salary. It will naturally be the biggest deduction and is mandatory for anyone earning over €9,000 a year. Tax rates are calculated on progressive rates, starting at 14% and rising to 42%, or 45% for very high incomes. It depends on your personal situation and which Tax Class you fall into, which is explained further below.
Solidarity surcharge – appears on your payslip as Solid.Zuschlag. It is charged at 5.5% of your total income tax paid. The payment was created in 1991 in order to help finance the country’s reunification efforts, funding infrastructural projects to help rebuild East Germany.
Church tax. Levied by the Finanzamt on behalf of the church institutions of Germany, the rate depends on where in the country you live but in Berlin it is currently 9% of your income tax. It is paid by those who have officially stated their religious affiliation. It is not obligatory; you select whether or not you want to pay this when you are registering your address. If you have no religious affiliation and want to opt out, make sure to state that on your Anmeldung by checking ‘keine Religion’. Once registered, it can be difficult to get out of so pay attention to what you’re writing on the form.
Social Insurance Contributions
Health insurance – appears on your payslip as KV-Betrag. One of the larger deductions, your health insurance contribution is 14.6% of your income tax. It’s not ideal but hey, you need it, and at least if you are publicly insured the costs are split half and half between you and your employer.
If you are privately insured your contribution is calculated according to your individual tariff.
Long term care insurance – appears on your payslip as PV-Betrag. For those publicly insured this is at a rate of 2.88% of gross income for childless people and 2.5% for those with children. It is also split equally between employee and employer.
Pension insurance – appears on your payslip as RV-Betrag. The second largest deduction, it is a fairly hefty 19.6% of your gross income, again paid 50/50 by employee and employer. It covers an old age pension for retirees as well as basic income for those unable to work through incapacity. Different to the pension system in many other countries, it is not a contribution towards a personal pension fund. The payments into and out of the system are simultaneous, in that the contributions made by the current working population are funding the current retirees.
Unemployment insurance – appears on your payslip as AV-Betrag. The current contribution of 3% of your gross salary is to ensure that you can continue to live well should you lose your job. It is also split equally between employee and employer.
In order to be eligible for this, you must have contributed to the fund for at least one of the last five years, and be registered with the employment office, Bundesagentur für Arbeit, as soon as you become unemployed. You must be actively seeking work and agree to accept a job from said office if they find you one in the correct field for your training or experience.
You can then claim a percentage of your previous salary for 6 months to two years depending on individual factors.
So there you have it, the seven most important factors that will affect the final amount of money you receive from your employer at the end of the month. The most important of these is of course your Lohnsteuer. Not only is it the largest deduction but it is also the one on which other contributions depend on.
Understanding German Tax Classes (Steuerklasse)
The amount of income tax you pay is dependent on your Tax Class, which in Germany is basically decided by your marital status. Archaic perhaps but that’s how it goes. One more time, let us break it down for you.
Class I. Applies to those who are single, divorced or permanently separated from their spouse, widowed, or married couples one of whom lives abroad.
Class II. Applies to single parents that do not live with a partner.
Class III. Applies to married people who have a higher income than their spouse who is in Tax Class V, and to widowers in the first year following the death of their spouse.
Class IV. Applies to married people who both have equivalent income.
Class V. Applies to married people who have a lower income than their spouse who is in Tax Class III.
Class VI. Applies to anyone’s second job, regardless of marital status. The employer paying the lower wage should apply this tax class.
While your Tax Class may be fairly easy to work out, all those percentages may not be. If maths isn’t exactly your forte, or you’d rather not fish out your calculator to do the sums, there are a number of online tools to help you do it in a jiffy. Just fill in your tax code and income and, tadaa, there’s your net income displayed in seconds. Happy calculating!