The finance minister wants to make smaller severance payments tax-free and abolish tax returns in paper form, just like tax classes III and V. A lot is also changing for companies.
Federal Finance Minister Lars Klingbeil (SPD) wants to simplify taxes. Photo: Christoph Soeder/dpa
Federal Finance Minister Lars Klingbeil is planning a tax exemption for severance payments of up to 5,000 euros if those affected start new work within four months and the job lasts for at least six months without interruption.
From 2027 onwards, tax returns should only be submitted electronically, meaning that the proportion of electronic submissions should increase from around 78 percent to around 95 percent.
Anyone who earns less than 800 euros annually will no longer have to submit a tax return in the future, which will reduce the number of mandatory assessments by around 11,000.
Tax classes III and V are to be abolished from January 1, 2030 and replaced by the factor method of tax class IV in order to reduce bureaucratic effort and strengthen taxation for second earners.
Berlin. Federal Finance Minister Lars Klingbeil (SPD) wants to simplify the tax system with a package of measures. The Handelsblatt has a draft of the “Tax Simplification Act 2027”, which is currently being voted on at an early stage within the federal government. If the law were passed in this way, a lot would change for employees, taxpayers and companies.
Klingbeil's plans provide for several points:
Smaller severance payments should be partially tax-free.
In the future, tax returns should only be done electronically.
The limit at which a tax return would have to be submitted for additional income increases to 800 euros per year.
Klingbeil also wants to abolish the controversial planned abolition of tax classes III and V, which the Handelsblatt exclusively reported on this week, with the law.
Klingbeil's 142-page law lists 28 measures to simplify taxes. There should also be fundamental relief for companies. “Corporate tax law will be simplified and structurally improved,” says the draft. At the same time, Klingbeil's law is intended to make the work of the financial administration easier.
These are the most important planned changes in detail:
Tax-free severance pay
The Ministry of Finance is planning a “tax exemption for severance payments if work is resumed in a timely manner”. The new regulation should apply to severance payments of up to 5,000 euros.
However, according to the draft law, certain requirements must be met. A new employment relationship must be started within four months. “The tax exemption only applies if the new employment relationship lasts for at least six months without interruption,” it also says. And: The severance pay figures must be regulated in a collective agreement.
“The regulation is intended to create incentives to take up new employment as quickly as possible and to relieve the burden on social security funds during the transition phase,” says the draft.
The tax office should make the decision as to whether all requirements are met as part of the tax return. The tax exemption should apply for the first time for the 2027 assessment period and only affect severance payments that were paid after December 31, 2026.
No more paper tax returns
The draft law stipulates that “from now on, income tax returns must no longer be submitted in paper form, but only electronically.” An obligation to submit data electronically, for example with the Elster tax software, currently only applies to self-employed people or traders.
Now the Ministry of Finance plans to extend it to all taxpayers, including employees and pensioners. According to the draft law, around 15.7 million citizens submitted their tax returns electronically and another 4.6 million in paper form for the 2025 assessment year. As a result of the change in the law, it is assumed that in the future around 95 percent of tax returns will be submitted electronically instead of “the previous 78 percent”.
The change is intended to reduce the effort in the tax offices and thus contribute to faster processing of tax returns.
No tax return up to 800 euros in additional income
In the future, anyone who has an annual income of a maximum of 800 euros in addition to their main job or pension should no longer have to submit a tax return for additional income. Previously, the limit up to which no tax return had to be submitted was 410 euros. An increase “reduces the number of compulsory assessments by approximately 11,000 cases,” according to the law.
Abolition of tax classes III and V
After the Handelsblatt reported this week that Klingbeil wanted to abolish the tax classes III and V, which are popular with married couples, there was criticism from the Union. The Finance Minister is still sticking to the plan - and specifies the deletion in the draft law.
In the future, taxation should be based on actual earnings. The so-called factor method of tax class IV is used for this. Spouses and life partners can currently decide whether they both want to be classified in tax class IV or whether one - the one with the higher income - uses class III and the other class V. From the point of view of many married couples, this offers advantages. In class III, for example, the monthly tax deduction is lower.
Based on the year as a whole, the tax class does not change the burden. The tax return checks whether too much or too little tax was paid and compensates accordingly. Therefore, couples who use tax classes III and V are also obliged to submit a tax return.
The Ministry of Finance justifies the planned change with the aim of reducing the number of tax returns. “The transfer of tax classes III/V to the factor method – in addition to financially strengthening the second earner – leads in many cases to less bureaucracy for citizens due to the elimination of mandatory assessment.”
“Tax classes III and V will no longer be used for wage tax deductions from January 1, 2030,” the draft law states.
Option model: simplification for companies
The draft law also provides for simplifications for the economy. The so-called options model is intended to become more attractive through various changes.
The option model allows partnerships such as craft businesses, which are subject to income tax, to switch to corporate income tax. This promises advantages in the future: The black-red coalition has decided to gradually reduce corporate tax from 2028, while income tax for very high incomes is to increase.
The Union in particular is therefore pushing for small and medium-sized companies to be able to switch to corporate tax more easily.
The corporate tax option will be “significantly improved,” the bill says. To this end, the handling of so-called special business assets will be “made more flexible”. Special business assets include land that belongs personally to a partner but is used for the business. Previously, they had to be transferred to the company when switching to corporate tax. Many company owners consider the rule to be a serious disadvantage of the previous option model.
New tax benefits for retained earnings
And there should also be improvements to a second rule that is important for partnerships. This is about so-called retention, i.e. profits that are not distributed to the shareholders but remain in the company and are used for investments. You will receive preferential treatment when it comes to income tax. The main aim here is to make adjustments in the event that partnerships actually switch to corporate income tax and have to pay additional tax on the benefited profits.
The improvements in the options model and retention are also politically relevant. The Union faction had threatened to block Klingbeil's income tax reform as long as there was no progress for the partnerships. If these now come with the simplification law, this conflict in the coalition would be defused.
There will be no major financial relief through the tax simplification law. Overall, the measures are “largely revenue-neutral,” the paper says. In 2027 and 2028, the Ministry of Finance expects slight additional income of 95 and 215 million euros, respectively. From 2029 onwards there will be loss of revenue for the tax authorities, initially of 355 million euros and in 2030 around 405 million euros.
Klingbeil is more concerned with making life easier for citizens and companies. “In order to relieve the burden on citizens and companies and strengthen the growth potential of the economy, tax regulations should be simplified, bureaucratic burdens reduced to the necessary level and the taxation process accelerated,” says a draft law.
