1. Income tax (Einkommensteuer)
What is it?
A tax levied on all types of personal income.
Sources of income:
Employment income (salary, wages)
Self-employment and business profits
Rental income from real estate
Income from agriculture and forestry
Other taxable income categories
Tax rate:
Progressive, depending on the income bracket
From around 14 % up to 45 % (top tax rate)
How is it calculated?
At the end of the year through the annual tax return (Steuererklärung)
The tax office combines all income, deducts allowances and expenses, and calculates the final tax liability
Can expenses be deducted?
Yes – a wide range of costs and allowances can reduce your taxable income, e.g.:
Work-related expenses (Werbungskosten)
Special expenses (Sonderausgaben)
Extraordinary burdens
Tax-free allowances and basic tax-free thresholds
Final settlement:
Once the calculation is done, you either pay additional tax or receive a refund.
2. Tax on investment income (Kapitalertragsteuer)
What is it?
A tax levied on profits from investments, such as interest, dividends and capital gains.
Sources of income:
Dividends from shares
Interest (bank deposits, bonds, etc.)
Profits from the sale of securities and investment funds
Tax rate:
Fixed at 25 %
Plus surcharges (solidarity surcharge and, where applicable, church tax)
In practice, this results in a total rate of about 26.375 %
How is it calculated and charged?
The tax is withheld immediately when the profit arises
This is done as a withholding tax (Abgeltungsteuer) by your bank or broker
The bank then transfers the tax directly to the tax office
Can expenses be deducted?
Generally no – ongoing investment-related expenses are not individually deductible
Only capital losses can be offset against other investment gains (within certain rules)
Settlement / reporting:
In most cases, you do not need to file a tax return solely because of investment income; the bank has already withheld the tax
Nevertheless, declaring your investment income in the tax return can be useful, for example:
if your tax-free saver’s allowance (Sparerpauschbetrag) was not fully used,
to offset investment losses,
or if you wish to apply for a “more favourable” assessment compared with the flat rate (Günstigerprüfung).
Quick comparison: income tax vs. tax on investment income
| Comparison point | Einkommensteuer (income tax) | Kapitalertragsteuer (tax on investment income) |
|---|---|---|
| Type of income | Salary, self-employment, rentals, agriculture, etc. | Only investment income (interest, dividends, capital gains, etc.) |
| Calculation method | Progressive tax scale, depending on total income | Flat rate, fixed percentage |
| Who pays it? | The individual pays after the annual assessment (tax return) | The tax is withheld automatically by the bank |
| Refund possible? | Yes – through the annual tax return | Possible in certain cases (e.g. unused allowance, loss offset, incorrect withholding) |
| Annual tax-free allowance | Basic tax-free amount (e.g. 11,604 € in 2025) for total income | Sparerpauschbetrag: 1,000 € per year for individual investors |
Important notes:
If you are an employee and also have investments, you may end up paying both types of tax:
Income tax on your salary
Tax on investment income on your capital gains
Investment income is normally taxed separately at the flat Abgeltungsteuer rate and is not simply added to your ordinary income for progressive taxation – unless you opt for an alternative treatment via the tax return.
Key German terms:
| German term | Meaning in English |
|---|---|
| Einkommensteuer | Income tax |
| Kapitalertragsteuer | Tax on capital / investment income |
| Abgeltungsteuer | Flat withholding tax on investment income |
| Steuererklärung | Annual income tax return |
| Sparerpauschbetrag | Annual tax-free allowance for investment income |
Editorial note:
The editorial team of this website strives to provide accurate, well-researched information by consulting multiple sources. Nevertheless, errors may occur or certain figures and legal rules may change over time and may not always be fully confirmed. The information presented here should therefore be regarded as an initial, non-binding guide. For binding, up-to-date and case-specific advice, please always consult the competent tax authorities or a qualified tax professional.
