Germany's Overtime Tax Break Stalls as Part-Time Workers Question Who Really Benefits

The promised tax relief on overtime bonuses in Germany has hit another roadblock, with the legislation now months behind its original schedule. What was meant to take effect on January 1, 2026, still lacks a final parliamentary vote as of August 2026, leaving employers and employees in limbo over how additional hours will be rewarded.

The draft bill, known as the Labour Market Strengthening Act, was first presented in September 2025 under the Merz cabinet. It forms a cornerstone of the coalition agreement, yet the gap between political ambition and legislative reality continues to widen.

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How the proposed exemption would work

Under the current blueprint, overtime premiums would become tax-free only under specific conditions. The rules draw a clear line between workplaces bound by collective bargaining agreements and those that are not. For employees in unionised settings, the exemption kicks in only for hours worked beyond the agreed full-time threshold of 34 hours per week. Everyone else faces a higher bar: 40 weekly hours must be exceeded before any tax advantage applies.

There is also a cap designed to keep the fiscal cost in check. Premiums would qualify for tax-free treatment only up to 25 percent of the regular base wage. The government's stated aim is straightforward — reward extra effort and make additional work more appealing at a time when skilled labour is scarce across many sectors.

The numbers behind the debate

Official data helps explain why the proposal has generated such attention. The Institute for Employment Research (IAB) calculated that German employees logged an average of 28.2 overtime hours in 2024. But the picture changes dramatically when looking at how that extra time is compensated. Only 13.1 of those hours were actually paid out, with the remainder either banked into working-time accounts or simply uncompensated.

To illustrate what the reform might mean in practice, the government has offered its own arithmetic. Take a worker earning 3,000 euros gross per month. If those 13.1 paid overtime hours were disbursed tax-free, the net gain would amount to roughly 30 euros per month. A modest improvement, critics note, for many households.

Who gets left out

The delay has reignited a broader argument about the reform's social balance. A substantial share of the workforce would see no benefit whatsoever. Part-time employees — who represent around 30 percent of all workers in Germany — fall entirely outside the scope of the tax break, since the thresholds are tied to full-time hours. Given that nearly one in two women works part-time, the criticism carries a distinctly gendered edge: the reform does little to narrow net-pay gaps between men and women.

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The government, however, shows no sign of budging on the threshold structure. Officials maintain that the law's purpose is to expand total working volume beyond the full-time mark, not to subsidise shifts within part-time arrangements. Until the bill clears parliament, though, that rationale remains theoretical — and the timeline for enactment stays uncertain.

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