More child benefit, lower taxes: Federal Council approves traffic light law

Families will receive five euros more child benefit from January. In Berlin, the Federal Council also gave the green light to compensate for the cold progression in income tax. This prevents a tax increase due to inflation. This is a success for Chancellor Olaf Scholz (SPD) – because after his traffic light coalition broke up, he emphasized that he absolutely wanted to get this law passed before Christmas.

Another success: After the Bundestag, the Bundesrat has also decided to financially secure the Deutschlandticket in local transport for the coming year. The change in the law concerns the transferability of remaining funds from government subsidies to subsequent years. The ticket currently costs 49 euros per month, but from the new year it will be 58 euros according to a decision by the state transport ministers. What will happen to the ticket in the long term remains to be seen.

The relief from child benefit and taxes should also help to get the economy out of its slump. Finance Minister Jörg Kukies said in the Federal Council: “Both will reduce consumer restraint, strengthen consumer demand and thus promote overall economic development.” In a difficult phase, this provides stability and relief. At the same time, the SPD politician was disappointed that further measures to strengthen the economy, such as easier depreciation, had to be deleted from the original draft law in order to secure the approval of the FDP and the Union.

From the beginning of the year, child benefit will increase by five euros to 255 euros. According to the Budget Committee, this means additional expenditure of around 4.2 million euros for the state. A further child benefit increase of four euros in 2026, which has also been decided, will cost another around 3.3 million euros.

The tax allowance for children will be increased by 60 euros to 6,672 euros in January. In 2026 it will increase by another 156 euros to 6,828 euros.

The immediate child allowance for low-income families will also increase by five euros to 25 euros per month from January. According to the Greens’ calculations, a family with two children and an income of 60,000 euros will be relieved of 306 euros in the coming year.

Due to the rising tax rate, without the reform, citizens would have to pay more to the tax authorities from January onwards, even if their salary increase only compensates for inflation. This effect is called cold progression.

To prevent this, several key parameters in the tax tariff are being shifted so that higher tax rates only take effect later. Among other things, the basic allowance will be increased by 312 euros to 12,096 euros, i.e. the part of the income that is not taxed. In 2026 it will rise again, then to 12,348 euros. The basis is calculations on the effect of inflation and the subsistence level in Germany.

The other key values ​​of the tax rate will be shifted by 2.6 percent. This ensures that you don’t have to pay more taxes just because of inflation. The exemption limit for the solidarity surcharge will also be adjusted. Only the limit for the rich tax, which is still above the top tax rate, remains the same.

The adjustments in the tax tariff in particular ensure that the federal states lose tax revenue. According to the Budget Committee’s calculations, the states will receive around 2.6 billion euros less in the coming year as a result of the law, and almost 5.2 billion in 2026. The federal, state and local governments together must expect a shortfall in revenue of almost 7.2 billion next year. In the future, they even have costs of more than 13.5 to 14.8 billion euros.

The German Economic Institute has calculated that despite the relief, many households will have less money available in the new year. At the same time, social security contributions are rising – and tax relief cannot compensate for this.

For a single with an average income of 50,000 euros gross per year, the additional burden is only reduced from 233 euros to 38 euros net per year. Even for single parents, increases in child benefit and changes in income tax rates are often not enough to turn a minus into a plus. According to the calculations, only jointly assessed couples with children can enjoy more money, depending on their income level.

Although the law was passed before the end of the year, citizens will not yet feel the tax relief in January. As the Ministry of Finance says, it takes a few weeks until they are traced in the administration and then become visible on pay slips. This might not work until March. The higher child benefit, on the other hand, should be paid out in January.

Note: This message has been updated.