Germany's €10 Billion Reform Package: A Small Employer's Payroll Playbook for 2027

If you run payroll for a team in Germany, January 1, 2027 is about to change the numbers on every payslip you issue. The basic tax-free allowance rises, the income-tax brackets shift, top earners face a brand-new 47% rate — and from the same date, your employees will owe you a doctor's note on day one of any sick leave instead of day four. None of it is automatic: your payroll software, your absence policy, and your hiring templates each need a deliberate update, and the employers who start now will have a calm December instead of a frantic one.

Here is what the coalition's "Programme for Revival and Employment" actually contains, what each piece means for a small employer's payroll desk, and the checklist to work through before the new year.

What the package is — and what it isn't yet​

On July 1, 2026, the leaders of Germany's governing coalition — the conservatives (CDU/CSU) and the Social Democrats (SPD) — agreed on a 34-point reform package covering taxes, labour law, pensions, and bureaucracy reduction. Chancellor Friedrich Merz presented it the next day in Berlin as the "Programme for Revival and Employment," a bid to restart growth in Europe's largest economy with roughly €10 billion a year in income-tax relief aimed squarely at lower- and middle-income earners.

One honest caveat before the details: a coalition-committee agreement sets the political direction, but each measure still has to pass through the Bundestag and Bundesrat as concrete legislation. The income-tax reform cleared the cabinet on September 2, 2026, which makes its numbers the firmest part of the package. The labour-law pieces are agreed in principle with drafts to follow. So treat this guide as a planning document: prepare your payroll for the figures below, but confirm the final statutes before you change any live calculation.

The €10 billion income-tax relief: new numbers for every payslip​

This is the part that touches every employer-employee relationship in the country, because wage tax (Lohnsteuer) is withheld from gross pay using statutory tables. When the tables move, net pay moves — and your payroll run has to match.

The basic allowance rises twice​

The Grundfreibetrag — the slice of income that is entirely tax-free — climbs to €12,564 in 2027 (up €216) and then to €12,900 in 2028 (up another €336). This is partly routine maintenance against "cold progression," the creep by which inflation pushes earners into higher brackets, but the two-step increase is locked into the reform's staged timetable, with full effect from 2028.

The middle brackets shift​

The second progressive zone is redrawn so that the 42% rate applies to taxable income from €70,601 to €249,999 starting in 2027. Combined with the higher allowance, the finance ministry's showcase figure is that a middle-income family with two children keeps more than €600 extra per year from 2028.

A new top rate appears​

To part-finance the relief, the existing 45% top rate will apply from €250,000 of taxable income, and a new 47% rate hits annual income above €280,000 — promptly nicknamed the "super-rich tax" in the press. If you employ anyone near those thresholds, their withholding math changes in the opposite direction from everyone else's, and they will notice.

What to update in payroll​

• Confirm your software vendor's 2027 table update. ELStAM (the electronic wage-tax database) delivers employee attributes automatically, but the tariff tables themselves come through your payroll software's annual update. Ask your provider now for its delivery date for the 2027 Lohnsteuer tables so January's run isn't hostage to a patch.
• Rehearse January net-pay figures. Run a test payroll with the new allowance and brackets for a few representative salaries, including anyone above €250,000. Employees understand "the law changed" far better when you can show them the before-and-after on their own numbers.
• Brief anyone who answers pay queries. Office managers and team leads should know the three headline numbers — €12,564 allowance, the 42% band starting at €70,601, and the new 47% rate — before the first January payslip lands.

Day-one sick notes: the end of the three-day grace period​

The most immediately visible labour change is also the simplest to state: employees will have to submit a certificate of incapacity for work (Arbeitsunfähigkeitsbescheinigung) starting on the first day of illness. Today the certificate is only mandatory once incapacity exceeds three calendar days — though employers have always been allowed to demand it earlier by contract or policy.

Two companion changes sharpen the effect. First, sick notes issued by telephone are being eliminated, so getting a certificate means an actual doctor visit (or video consultation where still permitted), not a quick phone call. Second, everything continues to flow through the electronic certificate (eAU), which the employer retrieves from the employee's health insurer rather than collecting paper slips.

Keep expectations realistic​

Do not budget this as an absenteeism cure. Employment lawyers note dryly that certificates are "not issued sparingly" in practice, so a day-one rule mostly moves paperwork forward rather than reducing sick days. And researchers commenting on the crackdown argue that rising absence rates reflect genuine strain — mental-health pressures and deteriorating conditions in sectors like care and education — more than abuse. The honest framing for your team: this is a compliance and process change, not a crackdown on legitimate illness.

What to update in payroll and HR​

• Rewrite the absence paragraph in your handbook and contracts. Replace "from the fourth day" language with a day-one rule, and spell out how employees notify you (whom to call, by what time) separately from the certificate itself.
• Tighten your eAU retrieval routine. With every absence generating a certificate from day one, the volume of insurer retrievals rises. Make sure whoever runs payroll knows how to pull eAUs promptly and reconcile them against reported absences — gaps are where continued-pay (Entgeltfortzahlung) errors breed.
• Watch the payroll cutoff. Day-one certificates mean more short absences documented inside the pay period. Align your absence-reporting deadline with your payroll cutoff so January's first run doesn't carry a backlog of uncertified days.

More flexible hiring — and a narrower change to dismissal rules​

The package's "flexicurity" flavour shows most clearly in hiring and separation rules. Two of the three measures below matter to ordinary small employers; the third affects only a thin slice of the workforce, but you should know where the line is.

Fixed-term contracts: four years, six extensions​

Fixed-term contracts without objective grounds (sachgrundlose Befristung) are currently capped at two years with at most three extensions. For employees hired by the end of 2030, the reform stretches that frame to 48 months with up to six extensions. For a small business unsure whether a new role will last, that is a meaningful widening of the low-commitment hiring window.

Separately, the written-form requirement for fixed-term agreements is abolished from January 1, 2027. Our advice: ignore that freedom. A fixed term that lives only in someone's memory is a lawsuit waiting for its date. Keep putting every Befristung in signed writing — the reform removes a formality, not the evidentiary value of paper.

Dismissal protection eased — but only for top earners​

From January 1, 2027, employers may ask the labour court to dissolve the employment of staff earning more than 1.75 times the pension contribution ceiling (Beitragsbemessungsgrenze) — over €177,450 a year on the 2026 ceiling of €101,400 — without stating grounds, in exchange for a court-set severance payment. The model is the existing "risk-taker" rule from banking law: if the dismissal itself was invalid and either side applies for dissolution, the court ends the relationship and fixes compensation, generally capped at twelve months' earnings (up to fifteen or eighteen months for older long-serving staff).

Two open questions keep this firmly in watch-and-wait territory: it is not yet settled whether the rule covers only contracts signed after the effective date or all dismissals issued after it, and very few small businesses employ anyone above the threshold anyway. File it under "know the line exists," not "replan your workforce."

Severance gets a tax sweetener​

Severance payments will carry tax benefits that grow the faster the departing employee takes up new work. Details are still unwritten, but the direction is clear: structuring a separation with a prompt re-employment in view could soon be worth real money to the employee — one more reason to handle exits with documented, good-faith process rather than brinkmanship.

Pensions: a longer horizon your workforce planning should reflect​

The pension overhaul matters less for next January's payroll run and more for how you think about tenure, retirement conversations, and benefits over the coming decade:

• The retirement age will track life expectancy after 2031, pushing beyond today's legislated ceiling of 67 — some estimates see 70 by the 2090s. Workforce plans that assume everyone exits at 67 need a longer tail.
• Early retirement for long contribution histories moves from 63 to 64, and will then rise in parallel with the standard age.
• Staying on past 67 gets a payroll-visible incentive: a separate bill before the upper house would grant post-retirement-age employees a €2,000-per-month tax-free allowance, applied through the employer's payroll deduction against gross salary. If it passes, keeping experienced staff a few more years becomes materially cheaper for both sides.
• Company pensions (bAV) are due a push, with a social-partner dialogue scheduled to lift coverage. If you don't yet offer an employer-supported retirement plan, expect both political pressure and employee questions to grow.

None of this changes a 2027 payroll calculation today. It does argue for reviewing, this autumn, what you offer employees approaching retirement age — because the employees are certainly reading the same headlines.

Less red tape for small businesses​

The package's least glamorous plank may save small employers the most hours. A dedicated bureaucracy-reduction bundle approved in mid-July 2026 aims to save businesses and citizens €600 million a year, bringing total annual relief since November 2025 to €10.4 billion. The SME-relevant items include simplified national data-protection rules using the available leeway in the EU GDPR, fewer mandatory in-house data protection officers in small and mid-sized firms, and faster works-council approvals for rolling out software and updates.

Practical move: ask your data-protection adviser this quarter whether your DPO obligation survives the simplification, and revisit any software rollout you shelved over co-determination friction — the procedural path is supposed to get shorter.

Your payroll checklist before January 1, 2027​

Do now (autumn 2026):

1. Get your payroll vendor's written date for the 2027 Lohnsteuer table update.
2. Draft the new day-one absence policy and eAU workflow; train whoever retrieves certificates.
3. Test-run January payrolls under the new allowance and brackets, including top-rate cases.
4. Review fixed-term templates against the coming 48-month / six-extension frame.
5. Ask your tax adviser whether the post-67 €2,000 allowance bill affects any current employee.

Do in December 2026:

6. Install and verify the 2027 payroll update before the first live run.
7. Publish the new absence rules to all staff with a plain-language explainer.
8. Confirm the final enacted text of each measure — coalition agreement is not statute.

Keep watching through 2027:

9. The severance tax-benefit details and the dismissal-threshold scope question.
10. The bAV social-partner dialogue and any new employer obligations it produces.
11. Further bureaucracy-reduction tranches and their DPO implications.

Track every change where your auditor can find it​

Tax-table updates, absence-rule rewrites, severance provisions, and company-pension contributions all land in the same place eventually: your books. When the 2027 Lohnsteuer figures take effect, reconcile the first payroll export line by line before it posts to the general ledger — a stale tariff table books the wrong wage-tax liability silently for months. Log absence-related continued pay against the eAU record it belongs to, so a later audit finds a clean trail instead of a spreadsheet of guesses. And if you recognise provisions for planned severances, document the assumptions while the reform details are still moving; estimates disclosed early are diligence, estimates reconstructed later look like fiction. Readers who keep their ledgers in plain text will find the account-mapping patterns in our /docs/ a useful starting point for structuring payroll and provision accounts so every statutory change stays traceable.

Keep Your Payroll Records Audit-Ready From Day One​

As Germany's reform package moves from coalition agreement to enacted law, the employers who fare best will be the ones whose records already tell the full story. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.