Bolstering the job market - Tax-exempt active pension and more …?
Economic growth can only be realised if there is also the necessary workforce that is able to provide (added-)value creation. The Federal Government has apparently also recognised this and has agreed to adopt an “Active Pension Act”; its entry into force is planned for 1.1.2026. In doing so, the intention is to take a stand against the shortage of skilled workers and for greater flexibility during the transition from working life to retirement.
Active pension
The aim of the active pension scheme is to make it more attractive for older employees to keep on working professionally. It will enable individuals who have already reached the statutory retirement age and who voluntarily continue working to earn up to € 2,000 monthly free of tax in addition to their regular income (e.g., pension). This provision relates solely to income from employment that is subject to mandatory social security deductions - thus typical employment relationships. The self-employed, tradespeople and civil servants will be excluded from the tax exemption.
The tax-exempt remuneration will be directly taken into account in the payroll tax deduction procedure. This will expressly be a tax-free allowance that may only be used on a monthly basis and not an annual tax-free allowance. The basic personal tax allowance (amount planned from 2026: € 12,238 p.a. for single persons) will be taken into account in addition. The tax progression clause (an increase in the tax rate for the remaining income), which was originally intended, will now be omitted. However, social security contributions for health insurance and long-term care insurance will still be payable; moreover, employers will have to pay contributions for statutory pension insurance and unemployment insurance.
According to estimates, the active pension scheme will cost the state around € 890m annually - an amount that will be allocated between the federal government, the states, and the municipalities and will solely benefit pensioners working as employees. However, in view of the unequal treatment when compared with younger individuals and other types of income, doubts about the constitutionality of the scheme are already being reported.
Other measures?
The active pension scheme was originally part of the draft for an “Act to Bolster the Job Market“ (Arbeitsmarktstärkungsgesetz) that included further tax concessions - at present, it is however unclear when they might be implemented.
(1) Tax-exempt bonus for extending working hours - It was also anticipated that those who increase their contractually agreed weekly working time by at least one hour and keep this up for at least 24 months would be able to receive a tax-exempt bonus for extending their working hours of up to € 225 per increased weekly hour; the maximum amount would be € 4,500. If the working time is reduced once again before the end of a two-year period, then the tax exemption would cease to apply with retrospective effect. The condition for the benefit would moreover be that the payment needed to be made in addition to remuneration that would in any case be due and that, in the previous 12 months, working time had not been reduced.
(2) Tax exemption for overtime premiums - The remuneration paid for overtime worked is subject to normal payroll tax. This also applies for overtime premiums paid, insofar as the overtime is not done at night or on Sundays and public holidays and is covered by existing tax and social security exemptions for such premiums. A general tax exemption for overtime premiums had already been agreed in the coalition agreement and, moreover, it was thus anticipated in the original draft legislation. The condition would have been that, in the 12 months prior to the payments being made, there had been no reduction in working time. Furthermore, the benefit would have been limited to a maximum of 25% of the basic pay. Besides, as in the case of the active pension scheme, an obligation to make social security contributions was envisaged.
