Income Tax in Germany in 2026: Rates, Calculation, Allowances

Personal Income Tax in Germany

In Germany, everyone must pay tax on the income they earn during the year. This tax is called Einkommensteuer — personal income tax.

It applies to most types of income, such as salary, self-employment, rental income or investments. The way the tax is paid depends on how you receive your income: for example, tax is automatically taken from your salary, but for some other types of income you have to calculate and pay the tax yourself.

Income tax is set by German law, mainly the Einkommensteuergesetz (EStG) ¹. Rules from the German Tax Code (Abgabenordnung, AO) ² also apply and set out general tax principles.

In most cases, the final amount of tax is calculated after the end of the year through a tax return (Steuererklärung). This return takes into account all your income, expenses and any allowances, and then works out the final amount of tax you need to pay or get back.

Income tax in Germany is compulsory for all residents. It is set by the Einkommensteuergesetz law and is calculated on all your yearly income.

It’s important to know that in Germany there is really just one income tax — Einkommensteuer. However, it can be collected in different ways, so you may see different names that people sometimes think are separate taxes. These include:

• Lohnsteuer (§ 38-42 EStG) — taken from your salary by your employer;
• Kapitalertragsteuer (§ 43-45 EStG) — tax on investment income (interest, dividends);
• Abgeltungsteuer — a type of withholding tax on investment income (for example, taken by your bank);
• Vorauszahlungen (§ 37 EStG) — advance payments for business owners and self-employed people, sometimes for pensioners and other groups;
• Einkommensteuer via tax return — final calculation of your tax through your annual tax return.

In practice, these are not different taxes, but different ways of paying the same income tax. The final amount is always worked out under Einkommensteuer — usually after the end of the year.

Which Income Is Taxed?

Income tax in Germany covers all types of personal income. The law lists several main categories of taxable income, including:

• Salary (Arbeitslohn) — earnings from employment;
• Self-employment and business income — freelance work or running a business;
• Rental income (Vermietung) — money from renting out property;
• Investment income — interest, dividends, profits from shares or other investments;
• Other income — for example, pensions or certain extra payments.

All these types of income are added together to work out your total yearly income, which is then used to calculate your tax.

You do not pay tax on your whole income: expenses related to earning your income (such as work-related costs) can be deducted, and there are also allowances and tax-free amounts.

You should also know that some types of income are taxed under special rules. For example, investment income is often taxed separately (Abgeltungsteuer), but in some cases it is included in your general income tax calculation.

Income Tax Rates in Germany in 2026

Germany uses a progressive tax scale. This means that the higher your income, the higher the rate of income tax you pay.

The following main rates apply in 2026 ³:

The German tax system works with tax bands. This means your income is split into bands, and each part is taxed at a different rate. The tax-free allowance (0%) comes first, then lower rates apply to the next part of your income, and only the highest part is taxed at the top rate. So even if your total income puts you into a higher band, that higher rate only applies to part of your income, not all of it. The top rate is just for the last portion of your earnings.

After adding up all your income and applying the rates to each band, you can work out your average rate — this is the real percentage of your total income that you actually pay as tax.

Tax-Free Allowance

A part of your income in Germany is not taxed at all. This is called the tax-free allowance (Grundfreibetrag).

As of 1 January 2026, the amount of the tax-free allowance is ⁴:

This means that if your yearly income is at or below this amount, you do not have to pay any income tax at all. If you earn more than this, you only pay tax on the part that is above the allowance.

There is also a tax-free allowance for children (Kinderfreibetrag). In 2026 it is:

This allowance is used when working out your tax if it gives you more benefit than receiving child benefit (Kindergeld).

The government reviews and usually increases all these allowances every year.

How Income Tax Is Calculated

The calculation of German income tax happens step by step. Tax is not charged on your full gross income, but only after deductions and using a progressive scale. In simple terms, here’s how it works:

• 1. Work out total income — add up all types of income (salary, rent, investments etc.)
• 2. Deduct expenses — such as work-related costs (Werbungskosten), business costs or other deductions Sonderausgaben, außergewöhnliche Belastungen
• 3. Apply any allowances
• 4. Get taxable income (zu versteuerndes Einkommen)
• 5. Apply the tax-free allowance (Grundfreibetrag)
• 6. The rest is taxed using the progressive scale — from 14.00 % up to 45.00 %
• 7. Apply any further reductions or reliefs

This gives you your total yearly tax bill. If you have already paid some tax during the year (for example through Lohnsteuer) this counts towards your bill, and at the end of the year you either get a refund or have to pay more.

An Example Income Tax Calculation

This simple example shows how German income tax can be calculated.

Tax Classes in Germany

Tax classes (Steuerklassen) in Germany are used to work out how much monthly salary tax (Lohnsteuer) should be taken from your pay. They decide how much tax is deducted each month from your salary, but do not affect your final yearly tax bill. Germany has 6 different tax classes, depending on your family situation. Read more about each class and how to choose one in our separate article.