How do wage and income replacement benefits increase my tax rate?

How do wage and income replacement benefits increase my tax rate?

Wage replacement benefits, such as unemployment benefit or parental allowance, are tax-free, but they are subject to the progression clause. This means that these incomes are taken into account when calculating your tax rate. As a result, the tax rate applied to your remaining income increases. This may lead to you having to pay additional taxes or receiving a lower tax refund.

How does the progression clause work?

The tax-free wage replacement benefits are added to your income to determine the tax rate. This higher tax rate is then applied to the taxable income.

• Consequence: Even income below the basic allowance can be indirectly taxed due to the higher tax rate.

Example calculation

A single mother earns 26.000 Euro gross per year and receives an additional 6.000 Euro parental allowance.

• Total income: 32.000 Euro
• Income tax (based on total income): 6.198 Euro (tax rate: 19.4%)
• Actually taxed: Only the income without parental allowance (26.000 Euro)
• Income tax: 5.044 Euro

Without progression clause: Tax for 26.000 Euro is only 4.333 Euro. Additional tax: 711 Euro due to progression clause. The solidarity surcharge and, if applicable, church tax also increase accordingly.

Basic allowance and progression clause

• Above the basic allowance: If your income including wage replacement benefits exceeds the basic allowance, the increased tax rate is applied.
• Below the basic allowance: If your income, even with wage replacement benefits, is below the basic allowance, it remains tax-free, and the progression clause is not applied.

Exception: Only wage replacement benefits

If you receive only wage replacement benefits throughout the year, your income remains tax-free, as the progression clause does not apply in this case.

Repayment of wage replacement benefits

If you have received too much wage replacement benefit, such as unemployment benefit, and have to repay it, this can reduce your tax rate. In this case, submit a tax return to benefit from negative progression.

• Note: If you have no taxable income in the relevant year, the repayment has no tax implications.

Tip: Use a tax programme such as Lohnsteuer kompakt to accurately calculate the impact of wage replacement benefits and the progression clause on your tax burden. A tax advisor can also help you avoid additional tax payments or optimise refunds.