The German Government has announced an extensive package of proposed tax, labour and pension reforms aimed at improving economic competitiveness, supporting investment and modernising employment legislation.
The 34-point programme includes measures affecting income tax, pensions, sick leave, employment flexibility and business regulation. While many of the proposals are still subject to parliamentary approval, employers should begin assessing how the reforms could influence workforce planning, payroll administration and HR policies in the years ahead.
A Broad Programme of Economic Reform
The reforms form part of the Government's wider strategy to stimulate economic growth, reduce administrative burdens and strengthen Germany's long-term competitiveness.
The proposals include:
Although the package covers a broad range of policy areas, several measures are particularly relevant for employers managing payroll and workforce compliance.
Tax Changes and Workforce Costs
One of the headline announcements is a package of income tax reductions for lower- and middle-income earners, expected to provide additional disposable income for many households.
The Government has indicated that part of this tax relief will be funded through an increase in the top marginal income tax rate for higher earners.
For employers, the potential impact extends to:
Employment Law Changes Under Consideration
The reform package also proposes several changes to employment practices.
Among the most significant is a proposal allowing employers to request a medical certificate from the first day of sickness absence, replacing the current arrangements that provide greater flexibility around short-term absences.
The Government has stated that the proposal is intended to reduce absenteeism and improve productivity, although it has prompted debate among employers, trade unions and healthcare organisations.
Additional proposals include greater flexibility around fixed term employment contracts and measures intended to simplify certain employment procedures for businesses.
No Dismissal Protection for Top Earners
The coalition plans to relax dismissal protection for high earners from 1 January 2027.
This would affect employees with annual earnings above 1.75 times the contribution assessment ceiling for statutory pension insurance; for 2026, this would amount to around EUR 177,450 per year, or approximately EUR 14,800 to EUR 15,000 gross per month.
Key point: protection of continued employment would be replaced by severance protection, meaning termination in return for payment of severance.
According to the information currently available, the rule is expected to apply only to newly concluded employment contracts; existing contracts would remain unaffected.
Pension Reform Remains a Long-Term Focus
Alongside employment reforms, the Government has outlined proposals to strengthen Germany's pension system in response to demographic change.
The Government is seeking to:
While many of these proposals will be introduced over several years, employers should monitor developments as they may influence workforce planning and retirement strategies.
What Should Employers Be Doing Now?
Although the reforms are not yet fully implemented, organisations operating in Germany should begin reviewing how the proposed changes could affect payroll, HR and workforce policies.
As the reforms progress, employers should consider:
Early planning can help organisations adapt more effectively as the reforms progress through the legislative process.
Germany – Global Insights
For further guidance on German payroll compliance, employment legislation, taxation and workforce management, visit the Germany Global Insights section on the activpayroll website.
Helping Employers Prepare for Legislative Change
Germany's latest reform package signals a significant period of change for employers. While many proposals are still progressing through Parliament, organisations should take the opportunity to review their payroll, HR and workforce strategies ahead of implementation.
If you would like to understand how these proposed reforms could affect your organisation, speak to our experts today.