Progressionsvorbehalt: why tax-free Elterngeld still costs tax
The Progressionsvorbehalt (progression clause, § 32b EStG) means that certain tax-free payments, such as Elterngeld, unemployment benefit (ALG I), sick pay or short-time work pay, are not taxed themselves but raise the tax rate applied to the rest of your taxable income.
Also: progression clause · progression proviso · Progressionsvorbehalt Elterngeld · § 32b EStG
Tax-free does not always mean without effect. Many German wage-replacement benefits are not taxed themselves, but they are counted when your tax rate is worked out, and that higher rate then applies to all your other income. The rule is § 32b EStG. Status: October 2026, 2026 tax schedule.
What it applies to
Among others (§ 32b (1) EStG):
- Elterngeld (parental allowance)
- Arbeitslosengeld I, partial unemployment benefit, Kurzarbeitergeld (short-time work pay), Insolvenzgeld
- Krankengeld (sick pay), Mutterschaftsgeld (maternity pay), injury and transition benefits
- compensation for lost earnings under the Infection Protection Act
- foreign income that a double tax treaty exempts from German tax
- if you move to or leave Germany during the year: foreign income from the part of the year in which you were not fully taxable in Germany
This last point catches many people who move to Germany: the salary you earned abroad before arriving is not taxed in Germany, but it raises the rate on your German salary for that year.
Not covered, for example, is the Aktivrente, up to €2,000 a month of tax-free salary after the statutory retirement age; the Federal Ministry of Finance states that it is not subject to the clause.
How it is calculated
- The benefits are added to your taxable income (for wage-replacement benefits, minus the employee allowance if your salary did not already use it).
- Tax on that total is calculated with the normal schedule, which gives an average rate.
- This “special rate” is applied to your actual taxable income, without the benefits.
tax = taxable income × (schedule tax on income + benefits) ÷ (income + benefits)
Example: parental leave with €10,000 Elterngeld
Mara has €30,000 taxable income in 2026 and receives €10,000 Elterngeld.
- Normal tax on €30,000: €4,217
- Schedule tax on €40,000: €7,209, which is 18.0225 %
- Tax with the clause: €30,000 × 18.0225 % = €5,406
The Elterngeld costs Mara €1,189 in tax even though it stays tax-free itself. Her employer knew nothing about it when withholding wage tax, so the difference is due with her tax return. Church tax and solidarity surcharge come on top where they apply; here the tax is below the surcharge threshold.
What people miss
- You must file a return. Anyone who received more than €410 of such benefits in a year has to file (§ 46 (2) no. 1 EStG).
- Plan for the back payment. Because too little wage tax was withheld, the bill usually arrives the following year. If you know parental leave or sick pay is coming, you can set the amount aside.
- Even income below the basic allowance can be taxed. The special rate applies to all your other income. With €10,000 taxable income and €10,000 unemployment benefit you are below the €12,348 basic allowance but still pay €785: tax on €20,000 is €1,570, a rate of 7.85 %.
- Couples. With joint assessment the combined income counts, so one partner’s Elterngeld raises the rate on the other’s salary.
In your plan
For parental leave, a job change with unemployment benefit or a long illness, include the back payment in the budget. The parental leave and Elterngeld calculator shows the household budget during leave, and the German salary calculator your net pay without benefits. The guide Can we afford a child and parental leave? covers family planning in more depth. The counterpart, where a low rate helps you, is the Günstigerprüfung.