Maximize Year-End Tax Savings: Unveiling 2 Secret Strategies to Boost Your Wealth
In 2024, employees in Germany have the opportunity to lower their tax burden through employee participation schemes such as share-based awards, particularly in startups, and Vermögenswirksame Leistungen (VL) savings plans. Here's a breakdown of these schemes, their key features, and eligibility criteria.
### 1. Employee Participation in Startup Equity Plans
For employees of startups, a special tax allowance of up to €2,000 in 2024 is available for equity awards acquired through employee participation plans. The taxable amount is generally based on the value of the shares at the time they are transferred to the employee. If the share value decreases by the taxable event date (and not due to dividends or capital repayments), the lower fair market value is used for taxation. Gains and dividends from such shares are subject to a 25% flat tax rate, though under certain conditions, 40% of the income may be tax-free. No employer social security contributions apply on these awards, reducing overall tax and social cost burdens.
### 2. Vermögenswirksame Leistungen (VL) Savings Plans
VL plans encourage employees to build assets through employer or employee contributions into approved investment or savings accounts. Typical employer contributions are around €40 per month (€480 per year). Employees can also contribute via payroll deductions. Contributions are locked in for six years plus a mandatory seventh year "rest" period, during which funds cannot be accessed.
Taxation for VL benefits counts as part of wages and is subject to tax and social security. However, capital gains on the invested funds may also be taxable upon withdrawal. The German government provides a savings bonus incentive: a 20% bonus on investments up to €400 annually, and a 9% bonus for building society savings up to €470 annually. The bonus is available for employees earning less than €40,000 annually.
To claim the bonus, employees apply via their annual tax return. Employers typically administer VL schemes through third-party providers and must be informed of the employees' investment choices to facilitate contribution payments. VL contributions up to €322 per month can be made tax-advantaged through salary conversion, with some exempt from social security contributions.
### Application Process Overview
- Employee notification: Inform employer of participation in VL or equity plans. - Employer administration: Employer partners with third-party provider for VL. - Payroll deduction: Employee contributions deducted via payroll (if applicable). - Contribution payments: Employer and/or employee contributions paid into investments. - Tax filing: Employee claims government savings bonus in annual tax return (VL) or tax benefits via allowances for equity awards.
### Eligibility Conditions
- VL plans: Available to most employees whose employers offer the scheme; best for those earning under €40,000 for full government bonus. - Equity awards: Primarily for employees in qualifying startups who meet plan requirements.
By leveraging VL savings plans with government bonuses and startup equity participation benefits with favourable tax allowances, employees in Germany can significantly reduce their taxable income and social security contributions in 2024. Filing an income tax return is mandatory to receive the employee savings allowance. The employee participation must be a wealth participation in the company of the own employer, which is granted as a tax-free "benefit in kind". Those who conclude two VL contracts can receive the employee savings allowance for both contracts. The capital participation does not have to be granted additionally to the due wage by the company. With the obligatory six-year term for VL contracts, up to 738 euros in subsidies can be accumulated. The state offers an employee savings allowance for VL equity savings plans, with an annual subsidy of up to 20% (maximum 400 euros deposit). The income limit for VL equity savings plans and building society contracts has been raised to 40,000 euros (80,000 euros for joint assessment).
- For individuals aiming to lower their personal-finance tax burden, employee participation in startup Equity Plans can offer a special tax allowance of up to €2,000 in 2024, with gains and dividends from such shares subject to a 25% flat tax rate.
- Another avenue for individuals to build assets and potentially reduce tax obligations is through Vermögenswirksame Leistungen (VL) Savings Plans. By contributing up to €322 per month, employees can enjoy tax-advantaged salary conversion and receive a government bonus of up to 20% on investments up to €400 annually.
