Tax-free pension allowance demystified: Simplifying the regulations - Tax-free pension limits clarified: A concise explanation of the rules
In Germany, retirees are subject to taxation on their pensions above a certain threshold. For new retirees in 2025, 16.5% of their pension income will be tax-free, a figure that decreases annually by 0.5%.
The current taxation share of the pension for new retirees stands at 83%. If a retiree had more than 11,604 euros in pension income in the previous year (2024), they generally have to file a tax return. This results in the 11,604 euros tax-free threshold for 2024 for new retirees.
Retirees can deduct certain allowances from their taxable income. These include the advertising cost allowance of 102 euros, the special expenses allowance of 36 euros, and retirement provisions of up to 1,739 euros. Retirees with advertising costs, special deductions, or extraordinary burdens may have a higher total income that is still tax-free, but this must be verified on a case-by-case basis by the tax office.
The regulation is intended to promote fairness in retirement savings and encourage younger people to save privately. A recent reform proposal introduces an "Active Pension" scheme allowing retirees to earn up to €2,000 per month tax-free on top of their pension income starting around 2025.
For long-standing retirees who retired as early as 2005, 50% of their pension income remains tax-free, resulting in a higher pension of 19,758 euros. The Ministry of Finance lists the tax-free pension amount for new retirees annually. In 2024, it was 16,243 euros for singles, and 32,486 euros for couples.
The tax-free basic allowance for income, unrelated directly to pension percentage, will be €12,096 in 2025. The full taxation of pensions will not apply until 2058, as regulated by the Growth and Chance Act.
In 2025, the threshold for filing a tax return is 12,084 euros. It's important to note that the tax-free pension allowance decreases each year due to the gradual adjustment of pension taxation, which has been in effect since 2005.
References:
- Reform proposal for an "Active Pension"
- Gradual adjustment of pension taxation
- Tax-free basic allowance for income in 2025
- The gradual adjustment of pension taxation policy in Germany, already implemented since 2005, has influenced the community policy by reducing the tax-free threshold for new retirees annually.
- For effective personal-finance management, retirees in Germany should be aware of the employment policy changes, such as the introduction of an "Active Pension" scheme, which could offer tax-free earnings on additional income starting around 2025.
