3,000 euros tax-free: the inflation compensation premium is here

Rising inflation has been a problem for German citizens for several months now. Exploding costs in almost all areas of life are causing dissatisfaction to grow among the population and many people's money is barely enough to maintain their current standard of living. At least there is now some hope in sight: on October 26, the so-called. Inflation adjustment premium, which was adopted by the traffic light government and which the Federal Council already approved on October 7, 2022.

From October 26, employers can provide their employees with a tax and duty-free bonus of up to €3,000 until the end of 2024. The regulation applies retroactively to October 1, 2022 and was announced in the Federal Law Gazette on October 25.

Inflation adjustment premium: 3,000 euros for everyone?

In the „Act on the Temporary Reduction of the VAT Rate on Gas Supplies via the Natural Gas Network“, the provision for a possible EUR 3,000 special payment was laid down and added to the Income Tax Act. The measure is a special payment to curb the rise in consumer prices. From October 26, 2022 to December 24, 2024, employers will now be able to provide their employees with financial allowances and benefits in kind up to a value of 3,000 euros. However, this does not mean that every employee will automatically receive this special benefit. This is because there is no fixed obligation for employers. This means that there is no legal entitlement for employees to receive the bonus.

Inflation adjustment premium does not have to be fully utilized

Companies are also completely free to choose the amount paid out. Neither the full 3,000 euros or a non-cash benefit of the same value nor the entire amount has to be paid out at once. Employers determine the amount of the bonus themselves and decide for themselves whether to pay it out in installments or not at all, for example. The only applicable rule is that the inflation compensation bonus is paid in addition to the employee's contractually agreed salary and is shown separately.

Taxes and social security contributions do not have to be paid. However, companies must respect the principle of equal treatment: If individual employees do not receive an inflation adjustment bonus, this must be perfectly justifiable. The works council's right to have a say must also be taken into account.

Will many companies pay an inflation adjustment premium?

How many companies will actually participate in the inflation compensation premium is still uncertain and difficult to predict. Many companies are equally affected by the coronavirus and price crisis and are themselves in an emergency situation. It can be assumed that employees with a collective agreement will be the main beneficiaries of the bonus. In the case of collective bargaining agreements, the inflation compensation bonus becomes part of the collective bargaining agreement, which entitles employees to the bonus. However, less than 50 percent of employees in Germany are covered by a collective agreement.