Parliament has approved legislation to allow companies to pay employees a temporary, tax-free “Inflation Bonus” (Inflationsausgleichsprämie) of up to 3,000 euros per annum in response to the impact of rising inflation in general — and energy costs in particular — on the cost of living. According to the Federal Statistics Office, year-on-year inflation was 10.0% in October 2022, with prices for food rising by 18.7% and for energy by a whopping 43.9%. If energy and food are excluded, the inflation rate was 4.6%. For its part, the International Monetary Fund expects annual inflation to be 8.5% in 2022 for Germany, falling slightly to 7.2% in 2023.
The Inflation Bonus is very similar to the one-off “Corona Bonus” of up to €1,500 in 2021 to 2022, which was also tax-exempt and excluded from covered wages for the purposes of employer and employee social security contributions. Inflation Bonuses can be paid at any time between October 1, 2022, and December 31, 2024, disbursed in one or multiple payments, subject to the annual limit of €3,000. Inflation Bonuses are in addition to normal compensation; they cannot be offered as substitutes for other bonus or pay plans and are not considered as income for income-related social benefits.
Other European Union (EU) countries have recently announced similar measures; for example, France is allowing tax-free bonuses, as is Austria where employers may also grant an annual tax-free bonus (Teuerungsprämie) of up to EUR 3,000 in 2022 and 2023. In 2023, calculation of this tax-free portion in the Netherlands will temporarily change from 1.70% to 3.00% of the first €400,000 of annual payroll, decreasing to 1.92% as of January 1, 2024.
Across the EU, high rates of inflation are eroding the purchasing power of employees’ salaries and exerting pressure on employers to do something to alleviate the lost purchasing power. At the same time, as the high rates of inflation are seen as transitory and heavily influenced by soaring energy costs (also hoped to be transitory), companies would like to restrain the level of permanent pay increases. One-off, non-taxable bonus arrangements such the Inflation Bonus in Germany may be helpful as an alternative to higher pay increases, particularly for lower-paid workers. Employers should therefore review how the Inflation Bonus relates to their compensation strategy in the current volatile environment and act accordingly.
WTW has just completed a survey to determine how companies are intending to make use of the Inflation Bonus. Please contact Florian Frank if you would like to learn more.