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ARTICLE · 23 JULY 2025

Practically Applying The Tax Free 'Inflation Compensation Allowance'

Flick Gocke Schaumburg
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For many employees, mitigating the consequences of increased consumer prices is currently of considerable importance.

GermanyEmployment and HR
Christian Hick
Christian Hick

For many employees, mitigating the consequences of increased consumer prices is currently of considerable importance. As a result, the authorities in Germany have reacted with inflation relief measures. On October 25, 2022, they introduced a tax free 'inflation compensation allowance' through its new law for the temporary reduction of the value added tax rate for the supply of gas via the natural gas grid.

According to Sec. 3 no. 11c of the German income tax act (GITA), employers may provide their employees an inflation compensation allowance between October 26, 2022 and December 31, 2024 (benefit period) to mitigate increases in consumer prices. This is not subject to either wage tax or social security contributions in the amount of up to EUR 3,000 in the form of cash payments and benefits in kind (the "inflation compensation allowance"). The application of Sec. 3 no. 11c GITA requires that the allowances and benefits in kind are paid/provided – as a voluntary

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