In October 2024, the Bundestag approved tax relief retrospectively to 1 January 2024. The basic tax-free allowance (Grundfreibetrag) and the child allowance (Kinderfreibetrag) were increased to reduce the tax burden and cushion the effects of inflation. These adjustments are based on the Existenzminimumbericht (Subsistence Level Report), which is regularly reviewed and adjusted. But how significant is this relief in reality?
What is the Grundfreibetrag and how is it determined?
The Grundfreibetrag is the amount deducted from income before tax is calculated. It is intended to ensure that the subsistence level (Existenzminimum) is not taxed. The Federal Constitutional Court (Bundesverfassungsgericht) has stipulated that this income must remain tax-free. The Grundfreibetrag is regularly redefined based on the Existenzminimumbericht of the Federal Government.
In 2024, the Grundfreibetrag increases by 180 Euro to 11.784 Euro per person. This reduces the taxable income (zu versteuerndes Einkommen), which in turn lowers the tax burden.
What does this increase mean in concrete terms?
An increase of the Grundfreibetrag by 180 Euro does not mean that every taxpayer automatically has to pay 180 Euro less in taxes. The actual tax saving depends on the individual tax rate applied to the taxable income.
An example based on average income in Germany (Statista) https://de.statista.com/themen/293/durchschnittseinkommen/:
Full-time employees earn an average of approximately 4.480 Euro gross per month (i.e. 53.760 Euro per year).
All employees (including part-time) earn an average of 3.540 Euro gross per month (i.e. 42.480 Euro per year).
The increase in the allowance means that 180 Euro of the income no longer has to be taxed. The tax saving therefore depends on the tax rate:
Employees with an assumed tax rate of 19.4 % (full-time employees) save:
180 Euro × 19.4% = 34.90 Euro
Employees with an assumed tax rate of 15.1 % (all employees) save:
180 Euro × 15.1% = 27.23 Euro
The actual tax saving due to the increase in the Grundfreibetrag is therefore, on average, between 27 and 35 Euro. For your individual calculation, please refer to the Tax Calculations and Levy Calculator (Federal Ministry of Finance): https://www.bundesfinanzministerium.de/Web/DE/Service/Apps_Rechner/Abgabenrechner/abgabenrechner.html
The Kinderfreibetrag: Calculation and relief for families
The Kinderfreibetrag is also regularly adjusted to cover a child's subsistence level as well as the costs for upbringing, care, and education. For the year 2024, the Kinderfreibetrag was increased by 228 Euro to 6.612 Euro per child and parent.
For parents, this means that for two parents, 13.224 Euro of income per child is not taxed. This increase can be more noticeable, particularly for higher incomes and multiple children. However, here too: the actual tax saving depends on the individual tax rate.
Relief through allowance increases?
Although the increase in the Grundfreibetrag and the Kinderfreibetrag represents a step towards relieving taxpayers, the actual effect on the tax burden is rather moderate. For many taxpayers, the tax saving resulting from the Grundfreibetrag increase is less than 40 Euro.
The increase in the Kinderfreibetrag also supports families, although the tax saving here is also dependent on income and can be more noticeable with multiple children.
Why are the allowances not adjusted annually?
The adjustment of the Grundfreibetrag and the Kinderfreibetrag takes place every two years, based on the Existenzminimumbericht of the Federal Government. An annual adjustment would theoretically be possible but would require a high level of bureaucratic effort and is therefore not planned. The two-year adjustment cycle offers the advantage that the allowances are based on sound data regarding price and wage developments.
Historical development of the allowances
The discussion regarding the exemption of the subsistence level began back in the 1990s. A milestone was the Bundestag resolution in June 1995, which provided for the introduction of the Existenzminimumbericht. Since then, this report has served as the basis for adjusting the allowances to ensure that the subsistence level remains tax-free.
Key laws include:
Inflationsausgleichsgesetz (2022) (Inflation Compensation Act): This law increased the Grundfreibetrag to 11.604 Euro and the Kinderfreibetrag to 6.384 Euro. However, the rise in the cost of living necessitated a further increase in 2024.
Steuerfortentwicklungsgesetz (2024) (Tax Development Act): This law provides for further increases in the Grundfreibetrag to 12.084 Euro for 2025 and to 12.336 Euro for 2026, to account for future living costs.
More information can be found in the Draft Tax Development Act 2024 (BT-Drucksache 20/12778): https://dserver.bundestag.de/btd/20/127/2012778.pdf as well as the Draft Tax Development Act 2024 (BT-Drucksache 20/12778): https://dserver.bundestag.de/btd/20/127/2012778.pdf
How are the allowances determined?
– Figures, facts, and background on the calculation of the Grund- and Kinderfreibetrag
The increase in the Grundfreibetrag and Kinderfreibetrag for 2024 is based on the Existenzminimumbericht, which is published every two years. This report ensures that the income necessary to cover basic living costs is not taxed. Here is a deeper look into the process of determining the allowances and the underlying figures.
1. Social law standard requirements – Basis for calculation
The social law standard requirements (sozialrechtliche Regelbedarfe), which correspond to "Hartz IV" rates or the "Bürgergeld" (Citizen's Benefit), form the basis for calculating the subsistence level. They determine which financial means are required to cover basic needs such as housing, food, clothing, and everyday expenses.
For the year 2023, the standard requirements were determined as follows:
Standard requirement for single adults: 502 Euro per month
Standard requirement for adult partners in a joint household: 451 Euro per month
Standard requirement for children under 6 years: 318 Euro per month
Standard requirement for children between 6 and 13 years: 348 Euro per month
Standard requirement for adolescents from 14 to 17 years: 420 Euro per month
These standard requirements flow into the calculation of the tax-free subsistence level, which was set at 11.784 Euro per person for 2024 (an increase of 180 Euro compared to 2023). This increase accounts for the sharp rise in living costs.
2. Wage and price development – Influence on the allowances
In addition to social law standard requirements, wage and price developments play a decisive role in determining the Grund- and Kinderfreibetrag. The Federal Statistical Office reported an average inflation of 6.9 % for the year 2023, which represented a significant burden for citizens.
Increasing living costs particularly include:
Rent and utility costs: Costs for housing rose by up to 10% in many regions, especially in metropolitan areas.
Food: Prices for food rose by an average of 13 % in 2023, which was a particular burden for low-income earners.
Energy: Costs for energy and fuel recorded a price increase of 19.1 %.
Additionally, there was an average wage increase in Germany of about 3.5 %. The Grundfreibetrag was raised to prevent inflation-related wage increases from leading to a higher tax burden – the phenomenon of bracket creep (kalte Progression).
3. Kinderfreibetrag – The subsistence level for children
The Kinderfreibetrag consists of two components: the physical subsistence level and the allowance for care, upbringing, and education (Betreuungs-, Erziehungs- und Ausbildungsfreibetrag).
For 2024, the Kinderfreibetrag was raised to 6.612 Euro per child.
Physical subsistence level: This includes a child's basic needs such as housing, food, clothing, and school materials. The standard requirements for children flow directly into this calculation.
Allowance for care, upbringing, and education: This amount takes into account the additional costs incurred for the care and education of a child, such as childcare costs or school expenses.
4. How the amounts are reached – An example calculation
Based on the standard requirements and price development, the subsistence level that must remain tax-free is derived. An example calculation for a single adult shows how the calculation looks in detail:
Standard requirement for a single individual: 502 Euro per month × 12 months = 6.024 Euro per year
Costs for housing and heating: 395 Euro (average warm rent in Germany) × 12 months = 4.740 Euro per year
Additional expenditures for healthcare and other necessary expenses: approximately 1.000 Euro
These components sum up to about 11.764 Euro, which corresponds to the Grundfreibetrag level of 11.784 Euro. This calculation ensures that the subsistence level in Germany remains "tax-free".
5. Adjustment in a two-year rhythm
The Existenzminimumbericht is prepared every two years and forms the basis for the adjustment of the allowances. The last major adjustment occurred in 2022, when the Grundfreibetrag was set at 11.604 Euro. In view of the exceptionally high inflation, this amount was raised by 180 Euro to 11.784 Euro in 2024.
Further increases are planned for the coming years:
2025: Increase of the Grundfreibetrag to 12.084 Euro
2026: Increase of the Grundfreibetrag to 12.336 Euro
These increases are intended to ensure that the subsistence level remains "tax-free", even if living costs continue to rise.
How the allowances are determined
The determination of the Grundfreibetrag and the Kinderfreibetrag is based on a detailed analysis of social law standard requirements, wage and price development, as well as further data from the Federal Statistical Office. These regular adjustments ensure that the subsistence level remains exempt from tax. The 14th Subsistence Level Report for 2024 led to an increase in the allowances due to high inflation and rising living costs, in order to relieve citizens and compensate for bracket creep.
Current standard requirements vs. actual reality of life
The standard requirements in Germany are intended to cover the basic living costs necessary for the subsistence level. This includes expenses for nutrition, clothing, personal care, household energy, and participation in social and cultural life. However, our research shows that the flat rates in the standard requirement often do not suffice to fully cover actual living costs.
Nutrition
For nutrition, the standard requirement for 2024 provides about 170 Euro per month. This is significantly below what an average adult in Germany actually spends on food and drinks. Depending on lifestyle and region, the real costs for a healthy diet are often between 200 and 250 Euro monthly. Rising food prices, especially in 2023, have further exacerbated this discrepancy.
Household energy (excluding heating costs)
For household energy (electricity, hot water, etc.), about 37 Euro per month is allocated in the standard requirement. This calculation is based on average values, yet the actual costs for electricity have risen sharply in recent years. Depending on household size, electricity consumption, and region, monthly electricity costs for a single-person household can range from 50 to 80 Euro or more.
Clothing and personal care
For clothing and shoes, only 37 Euro per month is provided in the standard requirement, and for personal care products about 18 Euro. While these amounts allow for a certain basic provision, they do not account for the fact that clothing must be purchased for different seasons and situations (work clothes, leisure, special occasions) and that repairs or replacements are occasionally necessary. The rising costs of clothing due to inflation and changed market conditions are not adequately reflected in the standard requirement flat rates.
Social and cultural participation
Another issue is the amount of 45 Euro for social and cultural participation. This amount barely covers participation in activities such as cinema, sports clubs, cultural events, or excursions, which are essential for a fulfilled social life. Especially in a time when social isolation is increasing, it is important that people with low incomes have the opportunity to participate in social life.
Actual living costs
The actually occurring living costs exceed the stipulated standard requirements in many areas. This becomes particularly clear in the areas of nutrition and household energy, where price increases are especially severe. While the standard requirement provides basic security, many people are dependent on applying for further state support or help from non-profit organisations to cover their living costs.
Our Statement:
The current standard requirements are an essential part of the welfare state and are intended to guarantee a subsistence level. The standard requirement is the basis for the Grundfreibetrag of income tax. However, the discrepancies listed show that the flat rates for nutrition, household energy, clothing, and social participation often lag behind actual costs. A regular and realistic adjustment of these flat rates to the actual reality of life for people in Germany would be urgently necessary to ensure that the standard requirement really suffices to cover the subsistence level.
One possibility would be for the Federal Government to incorporate these factors more strongly into the calculations of the Existenzminimumbericht and to consider not only average costs but also regional differences and specific life circumstances more heavily when determining the standard requirement.
Important but moderate relief
The increase in allowances for 2024 brings relief for many taxpayers in Germany, but does not reflect the actual circumstances. The tax effect is often on average only between 27 and 35 Euro. For families with multiple children, the tax saving through the higher Kinderfreibetrag may be more noticeable. However, most people must file an income tax return for 2024 to benefit from this.
Although the adjustments were made to compensate for bracket creep and to ensure that the subsistence level is not taxed, the design of needs-based support could be more specific.
Note This article serves as general information and was carefully created by the editorial team at Lexo.Tax. Personal tax advice can only be provided within the framework of membership at Lexo.Tax – and exclusively to the legally permissible extent according to § 4 Nr. 11 StBerG (Tax Consultancy Act).