Federal government plans tax incentives to stimulate the labor market

A leaked draft bill provides for several tax concessions to promote full-time work and longer working lives. The measures are aimed at the shortage of skilled workers and demographic change.

Three-pillar strategy against staff shortages

The Ministry of Labor has prepared a draft bill dated September 12, which is said to have already received political approval from Chancellor Merz despite the lack of departmental coordination. The planned regulations address various segments of the labor market with targeted tax exemptions. The proposed measures focus on three core areas: Extending the earning phase for pensioners, incentivizing overtime and incentives to increase part-time employment.

Active pension with constitutional question marks

Employees who continue to work after reaching the standard retirement age will receive up to EUR 2,000 per month tax-free. Social security contributions will continue to be payable and the progression proviso will remain in place. The restriction to employees appears problematic. Self-employed persons, tradespeople and farmers and foresters remain excluded from the benefits, which could raise constitutional issues of equal treatment.

Overtime bonuses are privileged

Supplements for overtime are to be tax-free up to 25 percent of the basic wage. This regulation only applies to hours above the agreed normal working hours and contains various abuse clauses. Part-time employees with less than twelve months of service and employees with recently reduced working hours remain excluded, unless corresponding agreements date from before July 1, 2025.

Staggered bonuses for increased working hours

Employers can grant part-time employees one-off bonuses of up to 4,500 euros tax-free for hourly increases. The calculation is based on 225 euros per additional weekly hour with a minimum commitment of 24 months. Anti-abuse rules also apply here: Recently reduced working hours or fixed-term part-time contracts of less than 24 months exclude the benefit.

Complexity versus steering effect

The German government is attempting to prevent deadweight effects through detailed exclusion clauses. However, this depth of regulation contributes to the further complication of tax law and is likely to generate a considerable administrative burden for both companies and the tax authorities. For Professional Services, new areas of consultancy are emerging in the practical implementation of these labor market policy tax instruments.