Pension income is treated for tax purposes in Germany. The amount of the tax depends on the year of retirement.
The taxable portion of the pension increases by one percentage point every year. People who retire in 2023 currently have to pay tax on 83 percent of their pension.
However, taxes on the pension are only due if the total amount of the payments from the old-age pension and the additional income exceed the basic tax-free allowance.
Almost 30 percent of the labor force in Germany will reach retirement age by 2036. This is based on data from Federal office of statistics (Destatis) out. But not everyone is looking forward to approaching retirement. The main reason for this is financial concerns.
Fast every fifth pensioner in Germany is already affected by poverty in old age and a look into the future shows: More and more people believe that they poor financial position in old age will be. Because not only the prices for the living space and the cost of living are skyrocketing. There is also annuity tax. In this article we explain how much money you have to give to the tax office in old age.
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Why is the pension taxed?
The fact that taxes are due on pension income is a thorn in the side of many people. But there is a reason for this: In 2005, the so-called “deferred taxation” was introduced. Their principle is based on the fact that all contributions that you pay into the pension scheme are tax-exempt or at least tax-privileged. However, your pension income will be taxed later. The percentage of your pension that is taxed depends on the calendar year in which you start your pension.
According to the German pension insurance the subsequent taxation is “usually an advantage”. This will reduce your tax burden during your working years. Since your income from the old-age pension is also lower, the tax portion of your pension is also lower.
Who has to pay pension tax?
It is true that taxes are generally payable on pensions. But that doesn’t mean that automatically every retiree actually has to pay taxes. The pension tax is only due if the total amount of your retirement pension and your additional income exceeds the basic tax-free allowance.
The basic allowance ensures that a minimum subsistence level remains tax-free for everyone and it changes from year to year. Currently he is according to the Federal Ministry of Finance for the year 2023 at 10,908 euros. In 2024, the basic allowance is to be raised to 11,604 euros. If you make average contributions to pension insurance during your working life and have no special additional income, there is a high probability that you will remain below the basic allowance when you retire and will not have to pay pension tax.
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What percentage of the pension is taxed?
The portion of your pension from which taxes are deducted is currently increasing every year by one percentage point. People who retire in 2023 must currently 83 percent pay tax on their pension. Those who retire in 2024 will have to pay tax on 84 percent, and so the percentage should continue to rise until taxes are due on the full 100 percent of the pension in 2040.
However, the federal government plans to slow down the increase in the percentage as part of a pension reform. Instead of one percentage point per year, the taxable portion should only increase by 0.5 percentage points annually. This would also extend the transition period: instead of 2040, it should now only be 2060 before you have to pay tax on 100 percent of your pension.
The part of your pension that you do not have to pay tax on is called the pension allowance. It decreases in the same ratio as the tax share increases. An example: Peter will retire in 2023 and, according to the current law, has to pay tax on 83 percent of his pension. The remaining 17 percent is not taxed. His pension allowance is therefore 17 percent. Sabine will retire in 2024 and will therefore have to pay tax on 84 percent of her pension income. There are no taxes on the remaining 16 percent. So she has a pension allowance of 16 percent.
What tax rates apply to pensions?
The pension as defined by the tax office is the gross pension – i.e. the amount of money before deducting the statutory social security contributions. The exact amount of pension tax depends on the amount of your pension and your personal tax rate. Basically, however, the higher your income, the higher the tax rate.
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The progressive tax rate applies to pensioners as well as to employees. The starting tax rate is 14 percent and increases gradually up to the top tax rate of 42 percent. You pay for this from an income of 62,810 euros. From an income of 277,826 euros, the maximum tax rate of 45 percent applies in Germany. This is also known as the wealth tax.
To calculate the pension tax, you have to multiply your gross pension by the tax portion, which depends on the year in which you started your pension. Example: If you start your pension in 2023, the tax rate is 83 percent. If your pension is 14,000 euros per year and the tax rate is 83 percent, 11,620 euros (83 percent of 14,000 euros) are taxable.