Tax-Free Additional Earnings After Reaching the Statutory Retirement Age – the “Active Pension” (Aktivrente)

The new tax exemption pursuant to § 3 No. 21 EStG (German Income Tax Act) requires that the employee has reached the statutory retirement age upon turning 67. People born between 1947 and 1963 are able to retire early and are also covered. However, early old-age pensions taken before reaching the statutory retirement age are excluded.

Only income from dependent employment (wages) is eligible. Self-employed persons, traders, and those engaged in agriculture and forestry are not covered.

Although the active pension is tax-free, social security contributions are still payable: i.e., contributions to health and long-term care insurance are due. These are shared between the employer and the employee.

For employees earning 2,000€, this means around 200€ in social security contributions. They therefore receive around 1,800€ net. Employers also have to pay contributions to pension and unemployment insurance. Employer contributions amount to around 412€ for a salary of 2,000€. The total cost is therefore 2,412€.

As a result, specific groups are excluded from the Active Pension, including, inter alia, controlling shareholder-managing directors, short-term employments, mini-jobbers, recipients of occupational pensions, and civil servants.

It is irrelevant whether an old-age pension is already being drawn or whether pension commencement is deferred. The tax exemption applies for the first time from the month following the month in which the statutory retirement age is reached and must be pro-rated if the requirements are not met for the entire calendar year.

Income of up to 2,000€ per month or 24,000€ per year is tax-free.

Despite the tax exemption, income under the Active Pension remains subject to social security contributions.

In particular, subsequent payments for periods prior to reaching the statutory retirement age (e.g., severance payments) are not eligible, nor are, inter alia, benefits granted in connection with company events or contributions to occupational pension schemes.

If Tax Class VI applies, the employee must confirm to the employer that the tax exemption has not already been applied in another employment relationship.

The Active Pension introduces a tax-free additional income of up to 2,000€ per month for individuals who have reached the statutory retirement age and continue working, thereby increasing net income and creating a clear financial incentive to remain in employment longer. At the same time, it aims to counteract the shortage of skilled workers by retaining experienced employees and allowing companies to continue benefiting from their expertise. A positive side effect is the strengthening of the social security system, as continued employment generates additional contributions to health and long-term care insurance.

However, the concept is not without drawbacks. Critics point to social inequality and limited access, as the scheme excludes the self-employed and primarily benefits healthier individuals, while those in physically demanding occupations are often unable to take advantage of it. There is also a risk of windfall effects, as the incentive may mainly benefit individuals who would have continued working regardless, thus limiting its impact on addressing structural labor market challenges. In addition, the tax exemption results in reduced public tax revenues and increased administrative complexity. Finally, as the additional income remains fully subject to social security contributions, the Active Pension provides no relief for either employees or employers in this respect.