Tax Allowances for Freelancers: Current Rules

Income tax law provides for a range of allowances. The most important is the basic personal allowance (Grundfreibetrag). Every freelancer, trader and employee benefits from this tax allowance. Further allowances, such as the child allowance (Kinderfreibetrag) and various flat-rate deductions, also merit attention.

In tax law there are various mechanisms that reduce the tax burden. Please note the significant differences between them! In particular, do not confuse the terms tax allowance (Freibetrag) and tax exemption threshold (Freigrenze):

• Tax allowance (Freibetrag): This is a fixed amount on which no tax is payable. Consider a hypothetical example: there is an allowance of 1,000 euros and your income is 1,300 euros. With a tax allowance, you pay tax only on the 300 euros above it.
• Exemption threshold (Freigrenze): The principle of the exemption threshold differs significantly. Once you exceed the threshold, tax is payable on the entire amount. In the example above, this would mean you would have to pay tax on the full 1,300 euros. You only benefit from the exemption threshold if you do not exceed the maximum amount.

It also matters whether you are entitled to a tax allowance unconditionally or whether you must meet certain criteria. The basic personal allowance in income tax law is one of the unconditional allowances, as is the saver's allowance (Sparer-Pauschbetrag) for investment income.

Other allowances are granted by the tax office when you meet the relevant conditions. This applies, among others, to child allowances and the home-office flat-rate deduction.

The basic personal allowance is the central allowance in tax law. No tax is payable up to this amount: as a freelancer, you may pocket the profit tax-free up to this level; only on profits above this threshold may you be liable to income tax. The annual basic personal allowance currently stands at the following levels:

• 2023: 10,908 euros; couples: 21,816 euros
• 2024: 11,604 euros; couples: 23,208 euros

The figures for couples are relevant where married couples opt for joint assessment.

Income above the basic personal allowance does not automatically give rise to income tax liability. Self-employed individuals, employees and others can claim further allowances and flat-rate deductions, special expenses and extraordinary expenditure. For many taxpayers, tax payments begin at an amount considerably above this basic allowance.

Tax allowances are designed to prevent citizens from facing an excessive tax burden. The basic personal allowance in income tax law illustrates this clearly: it is based on the subsistence minimum under social assistance law and thereby ensures that the state does not tax income that is indispensable for the cost of living.

The basic personal allowance applies to all earned income: if, for example, you earn money as a freelancer and also have a part-time job, you receive the basic allowance only once. When calculating income tax, the tax office aggregates all earned income. For investment income, there is a separate allowance in the form of the saver's allowance (Sparer-Pauschbetrag).

The tax office takes the basic personal allowance into account automatically — no action is required on your part. Beyond that, however, there are many opportunities to reduce your tax payments. For self-employed individuals, it is worth examining business expenses, for example: their level influences the profit and thus the taxable base. In addition, as a freelancer you can reduce your tax burden through special expenses and similar items. Let the experienced tax experts at Guhr Steuerberatung support you!