What does that mean? What is it subject to?

Anyone who becomes unemployed, goes on short-time work or takes parental leave no longer receives a full salary, but substitute benefits. This has consequences for taxes – and can lead to an additional payment.

In an emergency, the welfare state steps in: Those who lose their job, are ill for a long time or are sent on short-time work receive support – in the form of unemployment, sickness and short-time work benefits. Money continues to flow even during parental leave. And all of this tax-free.

Nevertheless, there is a catch: the progression proviso. We explain what it is, how it is calculated and why you have to file a tax return and possibly pay additional taxes because of it.

What does progression reservation mean?

Progression reservation is a term from tax law. It describes the phenomenon that certain income that is actually tax-free can still lead to you pay more taxes have to. This is because that income is the Increase the tax rate on your other taxable income can (more on this below).

The progression proviso exists because through it the so-called Performance principle should be maintained. This means that everyone should pay taxes to the extent that their economic capacity allows. In other words: those who earn more can – and should – give more to the state. And in the view of the legislature, tax-free income also increases this performance.

What is subject to the progression proviso?

The Income Tax Act (EStG) regulates which benefits are subject to the progression proviso in ยง 32b – and finally. That means: Everything that is not listed does not fall under the progression proviso. For example unemployment benefit II (Hartz IV).

The following tax-free income and state benefits are included:

  • Unemployment benefit I,
  • Short-time work allowance,
  • Top-up payments by the employer to the short-time work allowance,
  • Unemployment benefits,
  • Sick pay,
  • Injury benefit,
  • Parental allowance,
  • Maternity allowance and maternity allowance subsidy,
  • Bankruptcy money,
  • Transitional allowance for the disabled,
  • Compensation for loss of earnings according to the Infection Protection Act,
  • Compensation for loss of earnings in accordance with the Maintenance Assurance Act,
  • Top-up amount for partial retirement,
  • Income earned abroad that is tax-free in Germany due to a double taxation agreement.

Tax return is mandatory in the case of wage replacement

Do you in a year more than 410 euros tax-free wage replacement benefits you must get one the following year tax declaration submit. It’s called Compulsory assessment.

The Deadline this is usually July 31st. For the 2020 tax return, however, August 2, 2021 applies. Read here what you should consider when filing your tax return.

Because many employees are or have been on short-time work due to the corona pandemic, they are affected by this regulation. The state expects additional tax claims of 1.6 billion euroswho are supposed to repay short-time workers. Read more about this in our guide to the progression reservation for short-time work.

How is the progression reservation calculated?

In order to calculate the progression reserve, you must have a special tax rate determine. To do this, your taxable income and the tax-free income are added together.

For this total income then the Average tax rate determined but only applied to taxable income. The wage replacement benefits remain tax-free, but result in the remaining income being taxed slightly higher.

  • Example: Let’s assume that your taxable income in 2020 is 36,000 euros. Then 20.79 percent income tax and solidarity surcharge apply, i.e. 7,484 euros. But if you add tax-free income such as 5,000 euros short-time work allowance on top, your annual income is 41,000 euros and the tax rate increases to 22.65 percent. Theoretically, that would lead to a tax payment of 9,286 euros. Since the tax-free income is excluded, the tax rate of 22.65 euros only applies to the 36,000 euros. So you would have to pay 8,154 euros in taxes – 670 euros more than without the tax-free income.

You can calculate online how high your tax burden will be as a result of the wage replacement benefits. The Bavarian State Tax Office, for example, offers one Progression reservation calculator.

Good to know: Wage replacement does not automatically mean that you have to pay additional taxes. Whether this is the case depends, for example, on how much wage tax your employer has already paid to the tax office, what you can sellwhether you are assessed individually or with your spouse and, in the case of short-time work, to what extent you have short-time work. For married It may be worthwhile to change the tax class under certain circumstances.

What is a negative progression proviso?

A negative progression reservation means that the opposite occurs and your tax burden does not increase, but decreases. This is the case, for example, if you make losses with investments abroad or the state Reclaimed replacement services from you.

Both of these reduce your total income, which also lowers the tax rate. So you pay less tax than you would have paid without the losses or reclaims.


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