German Tax Codes Explained - Guide for UK Employers

If you’re employing someone with tax residence in Germany, you need to know about German tax codes to comply with the tax laws in Germany, and to make sure you pay your employees correctly.

This guide walks through the German tax categories which may apply, including some resources to help you learn more. We’ll also briefly touch on Wise Business which can be another super handy tool if you’re running your business across borders and need ways to run payroll or to get paid in different currencies.

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What is income tax in Germany?

In Germany, income tax brackets apply which dictate how much you pay, based on both your income, your location and your personal circumstances¹.

If you’re employed in Germany you pay wage tax or payroll tax - in German, lohnsteuer. This is deducted at source by your employer. Self employed people in Germany instead pay income tax, known as einkommensteuer.

Bear in mind that income might be the salary you’re paid by an employer, or could include other sources of money like rent or dividends. As with all things concerning tax, it’s important to understand your own personal situation and obligations - getting individual advice from a professional can help if you’re not sure what tax you should be paying for yourself, or withholding on behalf of your German employees.

What do tax codes mean in Germany?

Income tax in Germany is divided into 6 different income tax brackets. If you’re an employee in Germany, the local tax office will assign you a tax class based on your situation, and this will play a part in how much tax you pay on your earnings. We’ll walk through the tax codes one by one in a moment, but it’s important as an employer to understand these so you can help your employees understand their earnings properly.

So - what is the tax free allowance in Germany? As in the UK, employees in Germany can ear up to nearly 11,000 EUR annually without needing to pay tax - this amount is reviewed annually and may change - the exact figures for 2023 are shown below:

There’s a helpful tool on the German government website which lets you input your income and then view the likely tax you’ll pay³, if you’re not sure. In addition to income tax, there’s a solidarity tax, and there may be other taxes to pay such as church tax which can depend on your location and personal situation.

Tax codes in Germany explained - Six German Tax Brackets

Aside from income, the other thing which can impact your tax in Germany is your tax bracket - the steuerklasse to which you’re assigned by the local tax office. This tax bracket is based on your personal situation and can change, which means it’s important to keep your employer and your local tax office updated if your situation changes - for example, if you marry or divorce.

If you’re an employer you’ll need to know which tax class to assign your employees to, which the tax office can help you with - here are the 6 options:

Tax Bracket I

German tax bracket 1 covers single people - that may be those who have been separated, divorced or widowed. This bracket isn’t usually used for widowed people until the year following their spouse’s death.

Tax Bracket II

Tax bracket 2 applies to single parents who are living alone and who are unmarried, who will also be receiving child allowance or child benefit. This bracket is one you’ll need to apply to be placed in - contact the tax office if you think it applies to you.

Tax Bracket III

German tax bracket 3 is used for widowed people in the year their spouse dies, and can also be chosen if you’re a married couple where one partner earns nothing or significantly less than the other partner. In this case, the lower earner is allotted to tax bracket 5.

Tax Bracket IV

Tax bracket 4 in Germany is the one used for married couples and same-sex partnerships. If couples earn a similar amount it’s usually the best bracket to be placed into for both individuals as it means that allowances are shared.

Tax Bracket V

German tax bracket 5 is used if you’re a lower earner in a married couple and your partner selects to be in bracket 3.

Tax Bracket VI

Finally, tax bracket 6 in Germany is the one used for people earning more than one income.

Pay employees in the UK and abroad with Wise Business

If you’re growing your business at home and abroad, you can make it easier to manage payroll, with Wise Business.

Wise Business accounts support 40+ currencies, with simple, fast solutions to run payroll across multiple currencies. Make batch payments to up to 1,000 people with just a few taps - and get the mid-market exchange rate and low fees, too⁴. You’ll also have local account details to make it easier for your international customers to pay you, debit and expense cards to make spending and withdrawals easier, and lots of business friendly perks like cloud accounting solutions and a powerful API for automating workflow.

Learn more about how one Wise Business customer - RemotePass - has used Wise to grow.

Use this guide to understand the German tax code better, and to get ahead of the game when it comes to employing people in Germany. And while you’re here, check out Wise Business to make it cheaper and easier to pay your team in euros.

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Sources used for this article:

Sources last checked on Apr 9, 2024.