Tax-free pension amount explained: Determining the tax-exempt pension sum - What's the exemption level for my pension payments?
In a significant shift for retirees in Germany, the taxation of pensions is set to undergo changes starting from 2025. This transformation, brought about by the Growth Opportunities Act (Wachstumschancengesetz), will see new retirees paying income tax on their entire pension, with a basic tax-free allowance applied to their total income.
Before delving into the changes, let's take a look at the current taxation landscape. As of 2025, the basic tax-free allowance (Grundfreibetrag) for single pensioners stands at €12,096 per year, while for couples, it is €24,192. This means that if a pensioner's total income, including pensions and any other sources, stays below these thresholds, they will not pay income tax.
However, the Growth Opportunities Act, which came into effect recently, gradually increases the taxable share of pensions for new retirees. For pensions starting in 2025, the taxable portion is set at 100%, meaning the entire pension amount is subject to income tax. This reflects a continuation of a long-term plan where the taxable proportion of pensions has been rising year by year until it reaches full taxation for new retirees.
In 2024, the picture was slightly different. New retirees could receive up to 16,243 euros in annual gross pension without paying taxes. This equates to 1,323 euros per month, a significant sum that many retirees could rely on tax-free. However, 83% of this amount was subject to taxation.
For older retirees who went into retirement in 2005, the situation was even more favourable. They could receive up to 19,758 euros without paying taxes, with 50% of their pension income still tax-free.
It's important to note that retirees may have advertising costs, special assessments, or extraordinary burdens that can make their total income higher than the tax-free allowance and still be tax-free. However, the tax office must check this on a case-by-case basis. Retirees can also deduct the advertising cost allowance of 102 euros, the special expenses allowance of 36 euros, and retirement provisions of up to 1,739 euros in 2024.
The full taxation of pensions will not apply until 2058, as regulated by the Growth Opportunities Act. This gradual increase in the taxable proportion of pensions is due to the tax-free allowance decreasing each year due to the increasing proportion of the pension that is taxed.
In summary, the taxation of pensions for new retirees in Germany is undergoing changes. From 2025, new retirees will pay income tax on their entire pension, with the usual basic tax-free allowance applied to their total income. Older retirees who went into retirement before 2025 may still have a portion of their pension income tax-free, depending on the year they retired. It's crucial for retirees to understand these changes and seek advice from tax professionals to ensure they are compliant with the new regulations.
[1] Source: Federal Ministry of Finance (Bundesministerium der Finanzen)
In light of the forthcoming changes in 2025, it's essential for retirees to familiarize themselves with the new employment policy and community policy regarding pension taxation, both of which are highlighted in the Growth Opportunities Act (Wachstumschancengesetz). This legislation sets the stage for new retirees to pay income tax on their entire pension, with a basic tax-free allowance considered against their total income, which aligns with the escalating employment policy that has been steadily increasing the taxable proportion of pensions for retirees over the years. Furthermore, retirees may need to be aware of personal-finance implications such as advertising costs, special assessments, or extraordinary burdens that could impact their overall income and tax liabilities.
