The new tax plan: It could boost overtime pay for millions of people
Germany’s government under Friedrich Merz is planning a tax reform that could slightly increase net salaries for millions of employees. The proposal focuses on making overtime bonuses tax-free to ensure extra work results in higher take-home pay.
Many employees in Germany regularly work overtime, yet a large portion of these additional hours are unpaid or only partially compensated. To address this, the government included a measure in its coalition agreement aimed at reducing the tax burden on overtime bonuses.
Under the proposal, bonuses paid for overtime that exceeds the full-time hours defined in collective agreements will be exempt from taxation. However, the overtime pay itself will remain taxable. The tax exemption will apply only to the bonus portion and only when employees exceed minimum weekly working hours of 34 hours under collective agreements or 40 hours for jobs without such agreements.
The tax relief will also have limits. Only overtime bonuses up to 25 percent of the basic wage will qualify for the exemption. The measure focuses on regular overtime hours rather than work during specific times such as evenings, weekends, or public holidays.
The plan was introduced on September 12, 2025, as part of the draft "Gesetz zur Stärkung des Arbeitsmarktes (Law to Strengthen the Labor Market)." The proposal suggests that the tax exemption would take effect on January 1, 2026, by expanding existing tax exemption rules in Section 3 of the Einkommensteuergesetz (Income Tax Act).
According to data from the Institut für Arbeitsmarkt- und Berufsforschung (Institute for Employment Research, IAB), employees in Germany worked an average of 28.2 hours of overtime in 2024, with more than half of those hours unpaid. Estimates show that someone earning €3,000 gross per month and working 28.2 overtime hours monthly could gain around €64 more in net pay under the new rule.
However, critics warn that the policy mainly benefits full-time workers. The regulation applies only to overtime performed beyond full-time contractual hours, meaning part-time workers are unlikely to qualify for the tax relief.
This has raised concerns about inequality in the labor market. In 2024, nearly 30 percent of employees worked part-time, and women were particularly affected. Data from the Statistisches Bundesamt shows that almost every second employed woman works part-time, compared with only about 12 percent of men, meaning many women may not benefit from the proposed tax change.