Germany's Income Tax Reform: What Actually Changes for the Self-Employed

If you run a sole proprietorship or work as a Freiberufler in Germany, your business profit is your income. There is no corporate layer between the two. So when the income tax tariff moves, your tax bill moves with it, and the IfM Bonn numbers say that describes most German businesses: 59.0% are sole proprietorships and 12.0% partnerships (data year 2023).

Here is what the cabinet decided on 2 September, what it does to your bill at three profit levels, and what is worth doing before the law is finished.

What was decided, and when it bites

The coalition committee agreed the outline on 1 July 2026. The finance ministry put the bill through cabinet on 2 September. The package is worth around €10 billion a year, arrives in two steps in 2027 and 2028, and reaches full effect in 2028.

The parameters, as the ministry publishes them:

Two things follow immediately. First, the relief at the bottom is real but small: the ministry's own worked example is a couple with two children who are about €632 a year better off by 2028. Second, the change at the top is the only structural one in the bill, and it runs the other way.

For jointly assessed couples the Splitting rule in § 32a Abs. 5 EStG effectively doubles those thresholds, so the €250,000 line lands at €500,000 of joint taxable income.

What it does to your bill

The tariff itself sits in § 32a EStG. Below are three cases on the 2026 tariff, single assessment, no Solidaritätszuschlag and no church tax. This is our own arithmetic on the published formula, not a tax calculation for your case, and the new tariff is provisional until the law passes.

At €60,000 and €150,000 the new top brackets do not touch you. Both cases gain a little from the higher Grundfreibetrag and the flatter second progression zone, in the low hundreds of euros a year.

At €300,000 the new brackets do touch you, and you can isolate the effect band by band. The slice between €250,000 and €277,825 goes from 42% to 45%, which is €834.78. The slice between €280,000 and €300,000 goes from 45% to 47%, which is €400. Together that is about €1,235 a year, before whatever the lower zones give back to everyone.

That is not a catastrophe. It is also not what the word "reform" is usually reserved for, and it lands on people whose taxed profit is the same money they would otherwise reinvest. As I put it in episode 3 of Vier Millionen+: this is not a tax on the rich, it is a tax on the investment capital of the Mittelstand.

Open the episode on Spotify

"Where are the unicorns supposed to come from if we have no electricity for them?" (Cathi Bruns, in episode 3 of Vier Millionen+)

Cathi's name for the wider pattern stuck with me: "Bleib-unten-Politik", stay-down politics. Her point is about incentives, not about rates. If people see that extra work, extra training and extra risk get shaved off at the top, they stop doing the extra.

The rule that would have mattered more

There is a provision in German tax law built exactly for this problem. § 34a EStG, the Thesaurierungsbegünstigung, lets a sole trader or a qualifying partner tax profits they leave in the business at a reduced rate instead of at their personal tariff: 28.25% through 2027, then 27% in 2028 and 2029, 26% in 2030 and 2031, and 25% from 2032. Partners qualify if their share of profit exceeds 10% or €10,000. The application is made per business, per year.

The catch is what happens later. When the retained profit is eventually withdrawn, the Nachversteuerung is a flat 25% on the withdrawn amount. Stack the two and roughly 46% of the original profit has gone in tax by the time it reaches your private account, before Solidaritätszuschlag, which is our own arithmetic on the two statutory rates. That only pays off if the money genuinely stays in the business for years. It is why the relief is so little used, and why Mittelstand associations have been asking for it to be fixed for a decade.

Rödl & Partner's summary of the 1 July coalition decisions is blunt on this point: no decision was taken on the improvements to the Optionsmodell (§ 1a KStG) and the Thesaurierungsbegünstigung that the Mittelstand had been asking for. The rate at the top moved. The mechanism that would have let you keep working capital in the business did not.

If you are a Gewerbetreibender rather than a Freiberufler, remember that trade tax is credited against income tax under § 35 EStG, which changes the arithmetic above. Freiberufler pay no Gewerbesteuer at all.

Where the politics stands as of 7 September

The bill is a Regierungsentwurf, nothing more. It now goes to the Bundestag and then the Bundesrat, and the coalition wants it in force on 1 January 2027, which means passage this autumn.

The coalition is arguing about it in public. On 1 September a letter from state secretary Thomas Steffen in the economics ministry criticised the bill for not removing cold progression fully and demanded more relief for businesses, with reports quoting the phrase "hidden tax increase". On 2 September economics minister Katherina Reiche voted for the bill in cabinet anyway. On 3 September finance minister Lars Klingbeil accused her of damaging the government. As of the writing day nothing in the draft has changed as a result. Treat the thresholds above as likely but not settled.

One more caveat worth carrying: tax researcher Frank Hechtner has pointed out that individual constellations in 2027 can end up with less net income than before once contributions are counted. The relief is an average, not a promise.

What to do on Monday

1. Find your bracket. Take last year's tax assessment, look up the zu versteuerndes Einkommen line, not your turnover. If it is under €250,000, the new top steps are not your problem and you can stop worrying about them.
2. If you are close to €250,000, model it. Run the two bands above on your own numbers. Then ask your tax adviser whether the € figure is large enough to justify any restructuring at all. Often it is not.
3. Put § 34a EStG on the agenda. If you regularly leave profit in the business for equipment, hiring or a buffer, ask specifically: what would retained-profit taxation cost me over five years including the Nachversteuerung? Get the answer in numbers, not in principle.
4. Recheck your prepayments. Any change to the tariff feeds into your Vorauszahlungen. Our guide to how much tax to set aside in 2026 covers the reserve rule of thumb and how to get a prepayment reduced.
5. Diary the Bundestag date. Nothing is final until the Bundesrat has voted. Do not sign anything on the strength of a press release.

The tax bill is only one of three things Berlin moved this summer. The other two, the startup strategy and the pension package, are covered in my piece on episode 3, and the compulsory pension insurance proposal for the self-employed has its own breakdown here.

If the reading of all this is that your margin needs to be bigger before the tariff argues about it: a free 9am profile puts you in front of companies across DACH that hire freelancers directly.

This article is general information for practitioners and does not replace tax or legal advice.