Germany’s Federal Cabinet has approved the draft Income Tax Reform Act 2027, proposing higher personal allowances, child-related tax relief and employee deductions from 1 January 2027, alongside a new 47% top tax rate for high-income earners. The package would also reduce selected household tax reliefs and change trade tax allocation for qualifying data centres.
Germany’s Federal Cabinet (Bundesregierung) has approved the draft income tax reform Act 2027 on 2 September 2026, proposing tax relief for individuals from 1 January 2027 alongside higher rates for high-income earners.
The package would raise the basic personal allowance, child-related tax allowances and child benefit, increase the employee lump-sum deduction and adjust the income tax progression. It would also introduce a new 47% top tax rate while reducing selected household tax reliefs.
Income tax rates
Under the proposed 2027 changes, the basic personal allowance would increase from EUR 12,348 to EUR 12,564. It would rise further to EUR 12,900 in 2028.
The second progression zone would be flattened, with the 42% rate applying to taxable income above EUR 70,601. The 45% rate would apply from EUR 250,000, while a new 47% rate would apply to taxable income of EUR 280,000 or more.
The 45% threshold is currently EUR 277,826, according to the reform draft.
Child-related tax measures
The reform would increase the child tax allowance (Kinderfreibetrag) from EUR 3,414 to EUR 3,564 in 2027, followed by a further increase to EUR 3,654 in 2028.
Child benefit would also rise from EUR 259 to EUR 267 per month from January 2027 and to EUR 272 per month from January 2028.
The draft also provides for corresponding adjustments under the Federal Child Benefit Act.
Employee deductions and working premiums
The employee lump-sum deduction would increase from EUR 1,230 to EUR 1,430 from January 2027.
The maximum allowable base wage for tax-exempt Sunday and holiday premium pay would increase from EUR 50 to EUR 75 per hour. The limit for night work bonuses would remain at EUR 50.
Under the adjusted Social Security Compensation Regulation (SvEV), Sunday and holiday bonuses covered by a valid collective bargaining agreement would also be exempt from social security contributions up to the higher limit. For non-collective agreements and night bonuses, the social security exemption limit would remain EUR 25 per hour.
Changes to household tax relief
The proposed reform would reduce the tax credit for tradespeople’s services relating to renovation, maintenance and modernisation work.
From 2027, the tax reduction would fall from 20% to 15%, while the maximum annual tax credit would decrease from EUR 1,200 to EUR 900.
The flat-rate taxation of so-called mini-jobs, covering income of up to EUR 600 per month, would increase from 2% to 5%.
Special trade tax allocation for data centres
The draft also proposes changes to the trade tax allocation for data centres from 2027.
Under the proposed Zerlegungsmaßstab, 10% of trade tax would be allocated according to wages (Arbeitslöhne), while 90% would be allocated according to the non-redundant nominal electrical connection capacity of the data centre.
The measure would apply to data centres with an installed IT electrical load of at least 500 kW, as defined in the Energy Efficiency Act (EnEfG).
Fiscal and administrative impact
The government estimates that the reform package would reduce tax revenues across all levels of government by around EUR 1.55 billion in 2027 and EUR 5.61 billion in 2028, with smaller reductions expected in subsequent years.
The higher employee lump-sum deduction is also expected to reduce administrative work. The reform estimates that around 1.3 million taxpayers would save approximately five minutes each when filing their returns. It also projects around 1.04 million fewer manual inspections by local tax offices each year, assuming an automated processing rate of 20%.
These changes are estimated to generate EUR 17.2 million in annual administrative savings, equivalent to approximately 325 full-time administrative positions.
The draft bill will now proceed through Germany’s legislative process, including consideration and approval by the Bundestag and Bundesrat.
