(2023) How do wage and income replacement benefits increase my tax rate?

Income replacement benefits are paid to you 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 5.295 Euro, which corresponds to a tax rate of 16.54 percent. However, this tax rate is only applied to the income without parental allowance, so the tax is 4.300 Euro.

Without the progressive tax rate, the tax for an income of 26.000 Euro would only be 3.556 Euro. This means that for the actually tax-free parental allowance of 6.000 Euro, 744 Euro more in taxes must be paid. In addition, the solidarity surcharge (for very high incomes) and church tax may increase.

In this way, income is also taxed that would actually be below the basic allowance and thus tax-free. 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 have to repay an income replacement benefit later, 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.