Changes to wage tax and social security law from 2025

Changes to wage tax at the start of 2025

Current legislation

At the start of 2025, the Growth Opportunities Act (Wachstumschancengesetz), Annual Tax Act 2024 (Jahressteuergesetz 2024) and the Secondary Market Credit Fostering Act (Kreditzweitmarktförderungsgesetz) brought many changes to the law governing payroll. All three laws contain relevant amendments that employers need to keep in mind for payroll. However, some legislative initiatives, such as the mobility budget and the planned changes to benefits for electric vehicles as part of a company car scheme, were not implemented.

At the turn of the year, some rules came into force that affect the payroll system. They are implemented by the providers of the invoicing systems, mostly in a technical way. The tax authorities are also driving the electronic transfer of data forward. These include the new rules on annual payroll tax returns and the introduction of duties to issue electronic certificates (starting from 2026).

The change to the benefits in tax rate under Section 34 of the Income Tax Act (Einkommensteuergesetz – EStG) (the “one fifth rule”) is particularly important in practice, especially when negotiating severance payments. From the turn of the year, the reduction to the tax rate in Section 34(1) of the Income Tax Act will only be taken into account as part of income tax return and corresponding assessment. Employers will no longer apply the beneficiary “one fifth rule” directly when carrying out their payroll deductions. This could produce drawbacks in employees’ liquidity. HR personnel should be prepared for employees to ask questions about this during leaving talks. Non-resident taxpayers whose pay may be subject to a tax rate reduction can apply for assessment. 

Only part of the load is taken off the employer. They must calculate the corresponding remuneration separately in payroll and issue it correctly. This is the only way they can fulfil their disclosure obligations. If they fail to report it or their reporting is incorrect, they will be liable for any loss of tax.

Current case law and authorities’ interpretation

The tax authorities have specified their interpretation of the law governing various tax issues. The publications on particular mobility issues should be highlighted here in particular. These include: 

• the effect of having more than one residence when a company car is provided 
• new forms of charging infrastructure (changing batteries)
• designating a co-working space as the primary place of work and
• providing driver safety training.  

Furthermore, the tax authorities have specified their assessment of leasing electro bikes that are classified as powered vehicles under transport law. 

The most recent Federal Fiscal Court case law on company events is also very important in practice. The Federal Fiscal Court decided that an event can still be taxed at a flat rate of 25% under Section 40 of the Income Tax Act if the event, such as a Christmas party, is not open to all employees. See our article for more details. 

Lower Saxony Fiscal Court had to decide the practical question of whether subsidies to employees and customers made by the company when a director of the board leaves and another is appointed at the same time are to be qualified as an “employer’s event” (thereby being exempt from payroll tax) or whether they are relevant for payroll. The fiscal court took the event to be a tax-free employer’s function. An appeal at the Federal Fiscal Court is pending. 

Changes to social insurance at the start of 2025

Income thresholds for 2025

Since 1 January 2025, new income thresholds apply to state health and pension insurance. These are adjusted by the federal government on an annual basis using a statutory order to match the development of income. This ensures that the social insurance net remains stable. This year, for the first time since reunification of Germany, standard figures were set for the thresholds across the whole country. In past years, the figures for the states of former West and East Germany had been coming closer and closer together. They are now on the same level.

The current income threshold for:

• statutory health insurance has risen to 66,150 euros a year (5,512.50 euros a month) and the threshold for voluntary and private health insurance to 73,800 euros a year (6,150 euros a month). 
• statutory pension insurance is 8,050 euros a month (2024: 7,550 euros a month).
• the miners' pension insurance is 9,900 euros (2024: 9,300 euros).

Rules for mini- and midi-jobs 

The dynamic threshold for marginal employment changes with each adjustment of the legal minimum wage. Since January 2025, this is 556 euros, thereby rising by 18 euros. 

With the rise in the mini-job threshold, the income threshold for a job on which social insurance has to be paid in the transition zone was also raised. A “midi-job” is when an employee regularly earns more than 556 euros. He or she is thereby over the marginal income threshold. The maximum that midi-jobbers can earn is 2,000 euros. Employees who earn an amount in the transition zone pay reduced contributions to social insurance. The midi-job has been treated as a transition zone since 2003 to make it easier for employees to make the transition to work on which social insurance is paid.

Summary at the turn of the year

Legislation has not fulfilled the expectations of business (at least, not to some degree). Nevertheless, there are still some changes that need implementing. It’s worth looking at the current legislation more closely – some positive developments were incorporated into legislation at the start of 2025. This particularly concerns employee incentivisation and mobility, which shows that payroll is a dynamic field. It doesn’t only recognise social and technological needs and developments; it also responds to them. 

Our experts know how to exploit the opportunities that legislation provides for employers. Join our turn of the year webinar. Our experts will tell you all you need to know about the latest developments and get you ready for 2025. We’ll show you ways in which you can implement the changes for the new year in a legally watertight way and point out any pitfalls. So you’ll be prepared for the new requirements.

Sign up now.