🌈 A quick taster for you:
- Welcome to the wonderful world of taxes.
- How to get the most out of being a student.
- Nobody really pays the 42% top tax rate.
🧐 Why do I care?
It’s one of the painful consequences of getting older: the tax return. If you feel the same way, don't worry, we’ve got your back.
The first thing to realize is that no one really prepared you for this. There’s no classes on it in school, no sit-down chats with your parents where they say "My child, mom and I would like to talk to you about the German tax system", and even at college you’re unlikely to stumble into a "Tax return class 1" seminar. So let us take you by the hand and give you a little insight into paying tax in Germany.
🔍 What exactly is happening here?
- Make tax great again!
Tax has an image problem. Nobody wants to pay their tax, the super-rich hide themselves behind shell companies, and thousands of tax consultants will promise to find loopholes so that you only pay the minimum. Yet without taxes, literally nothing would work in our country. There would be no roads, no public transport, no ambulances, no politics, no social services. Above all, taxes are an expression of solidarity. They enable us all to live well together. Ultimately taxes are a good thing. At the same time, it's also perfectly okay to look into where you can save paying extra tax.
- Tax exemptions for students
As a student, there are several restrictions on how much you can earn or work. If you work more than 20 hours a week, you lose your student status and are considered an employee — meaning you need to pay more tax, as your employer will no longer pay all your social security contributions such as health insurance, pension insurance, and unemployment insurance.
In addition to the amount of hours you work, your monthly income affects how much tax you pay. In order to keep your student status, you’re not allowed to earn more than €450 per month. Although if working as a student trainee then you can earn more money so long as you are working less than 20 hours per week. There are also exceptions where students can work more than 20 hours — such as out of term-time, weekend-work, and night-work.
- The myth of a top tax rate
In Germany there’s an idea that we all pay soooo much tax. And that’s not wrong. But we need to put it into perspective. Firstly, we have a progressive tax rate in Germany. This means that people who earn more will pay more tax — because, for example, 25% of €50.000 is more than 25% of €20.000, and also because the income tax rate increases the more you earn. You can earn up to €9,744 without paying any income tax. Once you earn more than that, the tax rate starts at 12% and increases up to 42% which is the so-called top tax rate for salaries over €58,597. There’s actually an even higher rate, of 45%, for people with an annual income over €274,613. It's been a political discussion point for many years, but currently 45% is the highest rate of tax even for people who earn millions.
🤓 What does this mean for me?
If you’re a student then it’s worth adhering to certain limits of how much you work, so that you can go home with as much money as possible. The 20 hour limit, the €450 limit, or the €9,744 annual income limit will be important to be aware of. Keep in mind that any tips you receive don’t have to be taxed, which means that certain jobs can be pretty lucrative.
As soon as you start to earn more money, don’t be deterred by the idea of paying tax. Remember that paying tax is generally a good thing — they pay for infrastructure, security and medical care. But this is Germany, where we like to both pay our tax and complain about it! We’ll get into the details about how a tax return looks in another edition of The Briefing.