German Cabinet approves cuts in Parental Allowance – an opportunity for employers

Update from 19.11.2023: 

Early on Friday morning (November 17, 2023), the Bundestag Finance Committee concluded its final deliberations on the draft federal budget for 2024 for the time being. The planned reduction in taxable income is still coming, but gradually (possibly due to the not entirely absurd constitutional concerns about an introduction on January 1, 2024). Specifically, the income threshold will initially fall to 200,000 euros from April 2024 and then to 175,000 euros taxable income one year later. In addition, couples will still be able to receive parental allowance together for up to 14 months after the birth of their child, but only for a maximum of one month at a time.

The draft budget is to be finally adopted by the Bundestag in the session week from November 27 to December 1.

And so it has happened: in its 71st session on 16 August 2023, the German Cabinet approved cuts to Parental Allowance previously announced during the budget deliberations, in spite of considerable social protests.

The Cabinet approved Finance Minister Christian Lindner's (FDP) draft of a Budget Financing Act, which includes significant cuts in Parental Allowance for about 5% of all parents-to-be as of January 1, 2024.

So what will change?

In future, only parents and single parents who earn a taxable income of less than EUR 150,000 in the calendar year before the birth of their child will be entitled to Parental Allowance. The previous limits were EUR 300,000 for couples and EUR 250,000 for single parents.

When will the changes come into force?

According to the plans of the Federal Ministry for Family Affairs, and depending on the further parliamentary procedure, the changes are expected to take effect for all future births from January 1, 2024. In other words, the new income limit will apply to parents whose child is born after said date. For parents whose child is born up to and including December 31, 2023, the current regulation will apply.

The changes therefore not only affect future pregnancies, but catch parents-to-be who expect a birth date in the calendar year 2024 by surprise. For them, the claim to Parental Allowance (possibly firmly included in their financial planning) falls away completely.

How is taxable income determined?

Taxable income is not identical with gross income. When calculating taxable income, individual tax-relevant items (e.g. income-related expenses, individual tax allowances) are deducted from all income earned (e.g. wages, rental income). The taxable income can therefore differ for various employees, even if the gross salary is exactly the same. One can best find out the individual taxable income from the respective tax assessment notice.

Generally speaking, married couples who do not yet have a dependent child will reach the threshold of a taxable income of EUR 150,000 with a gross household income of EUR 180,000. For single parents, this threshold is likely to be reached at a gross annual income of about EUR 174,000.

So what will this mean from a workforce point of view?

Expectant, high-earning parents now face the real risk of not receiving Parental Allowance during their already planned parental leave and having to provide for their living expenses themselves. The statutory change thus leaves a short-term and significant support shortfall for successful families.

Thus, in terms of business practice, it can be assumed that HR departments and managers will now be confronted with enquiries from their anxious employees at short notice. Employers will have to react to the existing gap in coverage and provide security.

How should employers react?

Employers should first familiarise themselves with the changes under which conditions parental allowance is no longer being paid. Next, the following actions are recommended:

• Get an overview ("How many employees are likely to be affected by the change?").
• Active communication to the workforce ("We have the issue in mind and will address the matter in the best interest of our workforce").
• Provide a contact point in the company to take acute concerns and fears seriously and to gather challenges faced by employees.
  
  

In the future, it will be particularly important to close the existing gap. In the past, some employers have already begun to compensate their employees for loss of earnings due to parental leave. While in the past such compensation systems were primarily aimed at compensating for salary losses during parental leave, in the future they will also be expanded to include compensation for total lost Parental Allowance.

Committed employees expect to be able to reconcile family and career. Employers can now use this situation as a real opportunity to deal with the introduction and/or necessary adjustments of compensation systems and to be perceived as a caring employer. That's the only way to be successful in the battle for talent.