German Families Win Tax Relief as Coalition Toughens Sick-Leave Rules and Expands Fixed-Term Contracts

A sharp divide has opened between business leaders and unions after Germany's would-be governing coalition—CDU, CSU, and SPD—finalized a 34-point reform package on Thursday. While employer representatives celebrate what they call a long-overdue shift toward flexible labour markets and lower bureaucracy, worker advocates warn of growing inequality and a broken trust between employers and staff.

"I see a vote of no confidence in the workforce," said Verdi chief Frank Werneke, directing his harshest criticism at the plan's new sick-leave rules. From now on, all employees must present a medical certificate from the very first day of illness. The option of a phone-based sick note disappears entirely. The coalition defends the measure as a way to curb absenteeism; unions call it an unnecessary burden on workers.

Alongside the sick-leave overhaul, the government is loosening rules for fixed-term employment. Anyone hired before the end of 2030 can now work on a series of fixed-term contracts for up to 48 months, with a maximum of six renewals—all without needing a specific reason for the temporary arrangement. Previously, the legal limits were tighter. The coalition says this will give companies more planning certainty in volatile market conditions.

For top earners, dismissal also becomes simpler. Employees earning more than 1.75 times the contribution assessment ceiling—currently around €14,788 gross per month—will be easier to let go. In exchange, they receive a severance option. Those who find a new job quickly will benefit from tax-privileged severance payments, a move the government hopes will boost professional mobility.

The tax side of the package offers relief for middle- and lower-income families, financed in part by higher rates on the very wealthy. Starting in January 2027, the basic tax-free allowance, the child allowance, and the employee lump-sum deduction will all rise. A family with two children and a gross income of €60,000 should save more than €600 annually from 2028 onward. Child benefit will increase to €272 per month. The total volume of tax relief is around €10 billion.

To fund the cuts, the coalition is splitting the so-called "rich tax" into two new brackets: 45 percent on income above €250,000 and 47 percent above €280,000, while the standard top rate stays at 42 percent. At the same time, the flat-rate tax on minijobs will climb from 2 to 5 percent, and the subsidy for tradespeople's services will drop from 20 to 15 percent.

Beyond the immediate labour and tax changes, the coalition is laying the groundwork for a later retirement. It plans to introduce a capital pension and gradually push the retirement age beyond 67. The option to retire without deductions after 45 contribution years disappears; the earliest retirement age becomes 64. All recommendations from the pension security commission are to be implemented by the end of 2026.

Reactions from think tanks and associations are mixed. Employer president Rainer Dulger praised the direction. Holger Schäfer of the IW welcomed the new flexibility, and Enzo Weber of the IAB highlighted the incentives in the tax-friendly severance rules. But DIW president Marcel Fratzscher warned of a social imbalance, while Ifo president Clemens Fuest called the measures steps in the right direction but not yet a breakthrough for sustainable growth. The BDI saw a positive signal but said the higher rich tax could hurt the investment capacity of partnerships.

The government also pledged to cut bureaucracy, scrapping reporting requirements across the board with a goal of eliminating one in four documentation duties within a year. Small and medium-sized businesses and associations will get relief from certain data-protection obligations under the GDPR. An action plan against abuse of social benefits is to be drafted by July.

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