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

Income replacement benefits are paid tax-free, but they affect the progressive tax rate. This means that the tax-free income is added to your income to determine your personal tax rate.

Example: A single mother has an annual income of 26.000 Euro gross. In addition, she receives 6.000 Euro parental allowance. This makes a total income of 32.000 Euro. The income tax for this would be around 4.878 Euro, which corresponds to a tax rate of 15.24 percent. However, only the income without parental allowance is taxed at this rate, so the tax is 2.962 Euro.

Without the progressive tax rate, the tax on an income of 26.000 Euro would only be 3.195 Euro. This means that an additional 767 Euro in tax must be paid on the actually tax-free parental allowance of 6.000 Euro. In addition, the solidarity surcharge (for very high incomes) and church tax may increase.

This way, income that is actually below the basic allowance and would therefore remain tax-free is also taxed. If the actual income including income replacement benefits exceeds the basic allowance, the increased tax rate can be applied. However, if the income remains below the basic allowance even with income replacement benefits, it does not have to be taxed.

If you receive only income replacement benefits within a year, everything remains tax-free, and the progressive tax rate is not applied.

If you subsequently have to repay an income replacement benefit, for example because you previously received too much unemployment benefit, you should submit a tax return. This results in negative progression, as the repaid income replacement benefit can reduce your tax rate.

However, if you had no taxable income in the relevant year, it is not worth submitting the repaid income replacement benefit, as this has no tax implications for you.