Summary

Germany has a comprehensive social security system which provides a full range of old age, invalidity, sickness, unemployment and other social benefits, including family allowances and income guarantees. Entitlement to benefits generally derives from an individual’s contribution history, although some benefits arise due to residence in Germany.

Details

Contributions

The headline contribution rates are 19.6% each for employers and employees. However, there are income caps applicable to the different branches of social security (and no social taxes are payable at all on income over approximately €101,400 per year), such that the maximum contribution per year is just over  €18,000 each for employers and employees. The contribution caps applicable to German social security can make it advantageous for high salaried employees from agreement countries to fall into Germany social security rather than continue to pay home contributions.

Treaties

Germany has social security agreements with all European Economic Area countries and 22 non-EEA countries, including China, the UK, the US, Canada, Australia and India. These agreements determine which country levies social security contributions and provides benefits, and prevent social security being levied twice on the same income. Most inbounds expatriates to Germany therefore continue to pay home country social security rather than German contributions. The agreement with the UK limits home country coverage to two years. Special rules apply to individuals working in Germany and other EEA countries (plus the UK) on a regular basis.

The German authorities have a relatively accommodating approach to individuals who seek to extend their home country coverage under the above agreements beyond the usual limit of five years.

Exemptions

Germany allows deductions for a variety of expenses (both work related and in connection with private insurances for unemployment, disability, accident etc.). In practice because of the income cap on social security calculations these deductions only benefit lower paid employees.

Administration

Higher paid employees have the choice to pay private health insurance rather than contribute to the state health system. This adds complexity to withholding processes as although the rates are prescribed, the plan to which the employee contributes is their choice. There are more than 100 such providers. All other elements of social security contributions are calculated and withheld/paid over from payroll.

Benefits

The retirement age in Germany is currently 66, but is gradually raised to 67 by the year 2031. The state pension can be withdrawn from the age of 63 if 35 years of contributions have been paid, but if taken early, a reduced amount is payable. Other benefits are generally dependent on the payment of premiums (e.g. unemployment benefit, which requires contributions in one out of the last five years (in Germany or anther EU state)).

Need more specific advice?Ask an expert