Individuals in Germany are subject to an income tax, a solidarity surcharge, and, where applicable, a church tax. Individuals living in Germany are taxed on their international earnings unless they are excluded under the terms of a tax treaty. The concept of infinite tax obligation is known as this.
So that what belongs together grows together, the lengthy project Aufbau Ost followed after German reunification. With the solidarity surcharge (in short: Soli) every taxpayer supports this process – including foreigners who pay income tax in Germany.
Who has to pay the solidarity surcharge?
In principle, every taxpayer in Germany pays the Soli as a surcharge of 5.5 percent on income, wage and capital gains tax. The tax base is therefore the tax to be paid, with the Soli on top.
Legal persons, including corporations such as GmbHs and stock corporations as well as associations, pay it on their corporate income tax.
An unmarried, childless employee earns 2,000 euros gross per month. He has no religious affiliation, has statutory health insurance and pays an additional contribution rate of 0.9 percent. At the end of the month, his employer pays him 180.41 euros in income tax to the tax office.
The solidarity surcharge is a so-called supplementary tax. This means that the employee has to pay 5.5 percent of the wage tax amount in addition as Soli.
The employer also pays this amount for the employee. In the specific example for 2019, these are: 180.41 euros x 5.5 percent = 9.92 euros per month. We calculated with the tax calculator of the Federal Ministry of Finance.
Banks pay Soli anonymously
There is also the soli surcharge on taxable investment income. This includes interest, dividends and profits from the sale of stocks and funds.
Up to the saver lump sum of 801 euros per year, there is no tax. As soon as your investment income exceeds this savings allowance or the exemption amount submitted to the bank, the bank in Germany must withhold the solidarity surcharge in addition to the 25 percent withholding tax. This amounts to 5.5 percent of the final withholding tax to be paid.
The bank pays the tax anonymously to the tax authorities. The tax has a final effect. This means that in most cases a tax return is not required for investment income.
Only when you submit a KAP annex with your tax return can the tax office specifically assign these tax payments to you. You can get back any deductions that are too high in this way.
Who is exempt from Soli?
Low-wage earners are exempt from income tax through the basic allowance. But even low-wage earners with an income tax of up to 972 euros (exemption limit) do not yet have to pay a solidarity surcharge. This applies until 2020. From a tax amount of 973 euros, the solidarity surcharge increases gradually.
Only when you pay 1,340 euros in income tax per year will the full Soli of 5.5 percent become due. For married couples assessed together, double the value of 1,944 euros applies as the exemption limit and 2,680 euros for the full Soli. This tax relief for low wage earners was introduced in 1995 and has not increased since then.
Example calculation for the exemption limit for low income
The single, childless employee from the example above works part-time and then earns 1,540 euros gross per month. In tax class 1 he therefore pays 80.08 euros wage tax per month, i.e. 960.96 euros per year. It is therefore below the exemption limit of 972 euros per year and does not have to pay a soli surcharge.
With an income of 1,700 euros per month, on the other hand, he would achieve a wage tax liability of 116.33 euros per month and would have to calculate the full 5.5 percent surcharge of 6.39 euros on top. His annual tax burden would be 1,395.96 euros wage tax plus 76.68 euros Soli, a total of 1,472.64 euros.
With a monthly wage between 1,540 and 1,700 euros (moderation zone), the solidarity surcharge increases gradually to the full 5.5 percent. Example: With a salary of 1,600 euros, only 2.50 euros are due on wages tax of 93.50 euros. That is just under 2.7 percent as a surcharge.
If you want to calculate the solidarity surcharge for your individual case, you can use the free tax calculator of the Federal Ministry of Finance.
How will the Soli be calculated from 2021?
On November 14, 2019, the Bundestag passed the law to reduce the 1995 solidarity surcharge. Accordingly, the Soli will be completely eliminated from 2021 for an estimated 90 percent of the current Soli payers. For example, for single people with gross annual earnings of up to 73,000 euros.
Exemption limit rises to almost 17,000 euros
Around 90 percent of taxpayers will be exempt from Soli from 2021. Because the annual exemption limit, up to which no Soli are due, will be increased significantly. For an individually assessed person, it rises from 972 euros to 16,956 euros; with a joint assessment of 1,944 euros to 33,912 euros.
If the collectively agreed income tax does not exceed 16,956 euros (or 33,912 euros for married couples), no Soli are payable.
Less pollution in the mitigation zone
Another 6.5 percent of taxpayers, namely those with slightly higher incomes, will be burdened a little less in the future. These include, for example, singles with a gross annual income of a good 73,000 euros to 109,000 euros.
You move with your tax burden within a so-called mitigation zone. This begins at the exemption limit and goes up to an income tax liability of 31,528 euros. It prevents sudden load changes.
Because if the income tax liability were only a few euros above the established exemption limit, the taxpayer would otherwise have to pay the full 5.5 percent solidarity surcharge.
Instead, the soli grows within the mitigation zone with increasing income until it finally reaches the full rate of 5.5 percent.
No relief for those with higher incomes
Around 3.5 percent of taxpayers continue to have to pay the Soli in full. According to calculations by the Federal Ministry of Finance (BMF), this is the case if the taxable income is over EUR 96,409 (single) or EUR 192,818 (married). This corresponds to gross earnings for a single person of a good 109,000 euros.
No relief for successful investors
If the employer pays a flat-rate wage tax (for example 15 or 25 percent), then there is still a 5.5 percent solidarity surcharge.
The previous tax deduction also applies to successful investors with investment income, for example from interest, dividends and the sale of stocks and funds. If you have exhausted your saver lump sum of 801 euros, the bank will continue to deduct the 5.5 percent solidarity surcharge in addition to the 25 percent withholding tax.
There is no relief for corporation taxpayers either. A GmbH or AG has to pay 15 percent corporation tax. The full amount of the Soli will also be due in the future.
This is how much taxpayers will save in the future
But how does the melting of the Soli actually have an effect? In order to calculate the relief exactly, it always depends on the individual case. Relevant sizes are
- The taxable income, which in turn results in the income tax liability,
- The number of children (child allowance) and other allowances that affect the amount of income tax and
- The type of assessment (basic tariff for the individual assessment; splitting tariff for the additional amount assessment).
The tax software provider Haufe-Lexware has calculated four examples with different income levels and presented them in tables. According to this, a childless single person with a taxable income of 60,000 euros will save 893 euros in 2021 compared to the previous year. At 70,000 euros, his savings drop to 710 euros.
A family with two children and a joint taxable income of 140,000 euros saves around 1,840 euros. With an income of 300,000 euros, however, the family is not relieved.
The BMF provides online questions and answers on the extensive abolition of the solidarity surcharge as well as some examples of the relief effect. A family of four with a gross annual income of around 121,000 euros is said to have almost 1,000 euros more net. Up to an annual gross wage of around 151,000 euros, the Soli are waived for them.
Soli calculators are available on the BMF homepage and at smart-rechner.de.
Consideration of the exemption limit when deducting income tax
In the case of employees, the employer pays the Soli together with the wage tax. For other payments, such as vacation pay, annual bonuses and severance payments, the exemption limit in the wage tax deduction procedure will not be taken into account until the end of 2020.
Because of the significantly higher exemption limit, this will be changed from 2021. Employers must also observe the annual exemption limit for other payments. For employees with average wages, this has the advantage that no Soli are withheld from their wages during the year.
A tax return, solely to have the solidarity surcharge refunded, is then not necessary (Section 3, Paragraph 4a of the Solidarity Surcharge Act 1995).
How does a child allowance affect the solidarity surchage?
The amount of the solidarity surcharge is shown in a separate section on your tax assessment. Similar to church tax, it is determined directly by the tax office by means of an income tax assessment and, if a direct debit mandate is available, is also retained by the office. Unlike the church tax, however, you cannot deduct the solidarity surcharge from the tax.
If you can claim a child allowance, this will be offset against the Soli. That means: The tax base decreases, on the basis of which the tax office calculates the amount of the soli to be paid.
For this reason, all parents can hope for the positive outcome of pending proceedings before the Federal Constitutional Court. The Lower Saxony Finance Court is of the opinion that the child allowance has been too low at least since 2014 and is also incorrectly calculated (decision of December 2, 2016, Az. 7 K 83/16).
The constitutional judges must now decide whether this is the case. All taxpayers with a child allowance would automatically benefit from a positive outcome. You could then expect a tax refund, very often retrospectively even with additional interest payments.
Soli payments only with reservation
If you take a closer look at the income tax assessment, you will find a provisional note regarding the solidarity surcharge in the explanations. This expresses that your tax office collects the Soli with the proviso that it is confirmed as lawful by the Federal Constitutional Court. The first constitutional complaint was filed for the tax year 2002, but it was unsuccessful. More lawsuits followed.
The current provisional notice is based on a successful lawsuit before the Lower Saxony Finance Court. The court considers the Soli to be unconstitutional for two reasons: On the one hand, as a source of funding in emergencies, it is limited in time and, on the other hand, it violates the principle of equal treatment set out in Article 3 of the Basic Law.
Because there are comparable situations that result in a different payload. This is related to the imputation regulations for foreign income. For example, an employee who only lives and works in Germany has to pay a higher solidarity surcharge than if, all other things being equal, they were working as a cross-border commuter, i.e. working abroad.
The Federal Constitutional Court should now decide on this in the proceedings (Az. 2 BvL 6/14). In this case, too, taxpayers do not have to take any action and, thanks to the provisional notice, can confidently wait and see what comes out.
The supplementary levy is unlimited
In fact, the Soli was initially only introduced for one year in 1991 in order to finance one-off additional expenditure by the state. This included a share in the costs of the second Gulf War and the promotion of states in Central and Eastern Europe. At that time, the surcharge was 7.5 percent of income tax.
The soli is not only used to build up the East
The supplementary levy was suspended for the following three years. But since 1995 the tax authorities have been collecting them as an unlimited surcharge on the income tax payable. He justified the reintroduction with the permanent burdens for the reunification of Germany.
In 2018, the federal government achieved around 19 billion euros, which it alone is entitled to and which it can use as it wishes. Taxes generally serve to finance the state and are never earmarked.
In the political discussion, the soli are often mentioned together with the solidarity pact, as financial support for the new federal states. With the solidarity pact, the federal and state governments agreed to give the new federal states special support within the framework of the state financial equalization in order to bring the economic level of East and West Germany closer together. In contrast to Solidarity Pact II, which will expire at the end of 2019, the solidarity surcharge has no time limit.
Criticism of the partial abolition of the Soli
Some politicians and associations nevertheless demanded that the Soli should be abolished by the end of 2019. However, the solicitation reform that has been resolved only provides for a partial abolition, which will not take effect until 2021. Above all, higher-income taxpayers and many medium-sized companies will probably have to continue paying it on a permanent basis.
With the help of the Association of Taxpayers, a couple is having a court check whether the Soli may still be required in 2020. The Nuremberg Finance Court (Az. 3 K 1098/19) dismissed the action, but admitted the appeal to the Federal Fiscal Court (Az. IX R 15/20). In a letter dated January 4, 2021, the Federal Ministry of Finance obliged the tax offices to expand the previous provisional note in tax assessments.
From the 2020 assessment period, it will also include the question of whether the further collection of the solidarity surcharge after the Solidarity Pact II expires at the end of 2019 is constitutional.
The FDP and SME associations have also announced that they will sue for the partial abolition. The courts will have to review in the next few years whether the partial abolition is constitutional.
Many tax experts are calling for the Soli to be abolished as soon as possible. If politicians want to burden higher earners more systematically, they could achieve this more systematically by increasing the progressive income tax rate and still secure the hoped-for income.