Care Allowance Reform 2026: What Employers Need to Adjust in Their Payroll Software Now

Starting January 1, 2026, a tacit but far-reaching reform in the wage tax deduction procedure is imminent, and hardly anyone is prepared for it. The recalculation of the care allowance affects every employee and every company in Germany. While public attention is focused on AI and digitalization, payroll departments must now adjust their systems, review processes, and inform employees. Those who do not react in time risk incorrect payroll calculations and conflicts with the tax office.

The Reform That Almost No One Is Aware Of

January 1, 2026, brings one of the largest changes in the wage tax deduction procedure in years – and hardly anyone is talking about it. While everyone is discussing AI, digitalization, and new work, a reform is underway in the background that affects every individual payslip in Germany.

The care allowance will be fundamentally recalculated. For millions of employees, the net salary will change; for companies, it will be the technical handling. Those who do not timely adjust their payroll software risk incorrect calculations and trouble with the tax office.

The problem: the reform was originally announced for 2024, then postponed to 2026. Many have lost sight of it. Time is running out. The Federal Ministry of Finance published the final guidelines on August 14, 2025. Software providers must deliver updates, tax advisors must inform their clients, and companies must adjust their processes.

What Is the Care Allowance Anyway?

The care allowance is a tax allowance used in wage tax calculations. It takes into account that employees pay contributions to statutory health, long-term care, and pension insurance, which are tax-deductible.

Until now, the finance office assumed that every employee spends at least 12 percent of their gross salary on these insurances (a maximum of 1,900 euros for tax classes I-IV, 3,000 euros for tax class III). Even if the actual contributions were lower, this minimum amount was considered tax-deductible.

An Example from Practice

Anna earns 3,000 euros gross, tax class I. Her actual insurance contributions:

• Health insurance: 120 euros

• Long-term care insurance: 60 euros

• Pension insurance: 280 euros

• Sum: 460 euros

Until 2025, however, the minimum care allowance of 360 euros (12% of 3,000 euros) was applied. Anna did not benefit from her higher actual contributions.

Starting 2026, that changes: The actual 460 euros will be included in the calculation. Anna's net salary will slightly increase because more will be tax-deductible.

The 3 Major Changes in Detail

Change 1: Elimination of the Minimum Care Allowance

From January 1, 2026, calculations will no longer use a flat rate of 12 percent, but rather the exact amounts that the employer pays to the insurances.

This means:

• Winners: Employees with high actual contributions (e.g., privately insured, well-paid employees).

• Losers: Employees with low contributions (mini-jobbers, part-time workers), who previously benefited from the flat rate.

Change 2: Inclusion of Unemployment Insurance

For the first time, unemployment insurance will also be included in the care allowance. Until now, only health, long-term care, and pension insurance were considered.

Currently, unemployment insurance is 2.6 percent of the gross salary (1.3 percent from both employer and employee). With a gross salary of 4,000 euros, that amounts to 52 euros monthly, which will now become tax-deductible.

Important: The total amount from health, long-term care, and unemployment insurance is capped at 1,900 euros (tax classes I-IV) or 3,000 euros (tax class III). Those who already reach this limit will not benefit.

Change 3: Electronic Data Exchange

Insurance contributions will in the future be automatically exchanged between health insurances, tax offices, and employers. No more manual entry required.

The process:

1. 1. Health insurance reports contribution amount to the tax administration

2. 2. Tax administration provides data via ELStAM (electronic wage tax deduction features)

3. 3. Employer's payroll software retrieves data

4. 4. Automatic calculation of wage tax with exact contributions

This exchange will start in parallel from 2026. Companies must ensure that their software is ELStAM capable.

What Does This Specifically Mean for Net Salary?

The effects are individual but calculable. Here are three scenarios:

Scenario A: Well-Paid Employees (Statutory Insured)

Markus, 45, Project Manager, 6,000 euros gross, tax class III/0

• Actual contributions: 1,850 euros (Health + Long-term Care + Pension + Unemployment Insurance)

• Previous minimum care allowance: 720 euros (12% of 6,000 euros)

• Difference: +1,130 euros deductible

• Tax savings (marginal tax rate 42%): approx. 475 euros/year = 40 euros/month more net

Scenario B: Privately Insured

Julia, 38, Business Consultant, 5,500 euros gross, tax class I, privately insured

• Actual contributions: 2,100 euros (Private Health + Long-term Care + Pension + Unemployment Insurance)

• Capped at: 1,900 euros (maximum for tax class I)

• Previous minimum care allowance: 660 euros

• Difference: +1,240 euros deductible

• Tax savings (marginal tax rate 35%): approx. 434 euros/year = 36 euros/month more net

Scenario C: Part-Time Worker (20 hours/week)

Tim, 24, Working Student, 1,200 euros gross, tax class I

• Actual contributions: 240 euros

• Previous minimum care allowance: 144 euros

• Difference: +96 euros deductible

• Tax savings (marginal tax rate 20%): approx. 19 euros/year = 1.60 euros/month more net

Conclusion: The reform primarily benefits well-paid full-time employees. Low earners hardly benefit.

Technical Implementation: Checklist for Employers

The reform requires adjustments in payroll software. The following steps are necessary:

Step 1: Check Software Update

Contact your payroll provider (Personio etc.) and clarify: DATEV, Lexware, SAP,

• Is an update for the care allowance 2026 planned?

• When will it be delivered? (at the latest December 2025!)

• Is the electronic data exchange via ELStAM already implemented?

• Are there training sessions for your payroll employees?

Step 2: Test ELStAM Retrieval

From 2026, employers will no longer need to manually record insurance contributions but can retrieve them via ELStAM. This saves time but only works if the technical connection is in place.

Test in December 2025:

• Does the software retrieve the current contribution data for all employees?

• Are privately insured individuals correctly captured? (Separate report required)

• Are there employees for whom no data is available? (e.g., voluntarily insured)

Step 3: Inform Employees

Some employees will have more net income, others less. Prepare a communication:

• "Starting January 2026, the wage tax calculations will change due to a legislative reform. Your actual insurance contributions will be considered exactly in the future. This may lead to slight changes in net salary."

Prepare for questions. Create an FAQ:

• Why is my net changing?

• Can I influence this?

• Will my gross change? (No, only the tax calculation)

Step 4: Conduct Pilot Calculation

Have a test payroll run in November/December 2025:

• Compare December 2025 (old calculation) with January 2026 (new calculation)

• Identify outliers: Who loses/gains more than 50 euros net?

• Check if the values are plausible

Step 5: Involve Tax Advisor

If you work with a tax office: Clarify the division of responsibilities. Who is responsible for the DATEV will provide updates for tax advisors by the end of 2025. Ensure your advisor has these implemented.ELStAM retrieval? Who checks the calculations?

Special Cases and Pitfalls

Privately Insured

For privately insured individuals, there is no automatic data exchange with the private health insurance. Here, employees must provide a certificate from their insurance showing the monthly contribution.

Problem: Many private health insurance rates have fluctuating contributions. How does the software handle this? Solution: Monthly updates instead of annual averages.

Marginally Employed (Mini Jobs)

Mini-jobbers do not pay social security contributions (except for pension insurance, from which they can opt out). For them, the care allowance is virtually eliminated.

Until 2025, they benefited from the minimum allowance; starting in 2026, they will no longer. This may lead to shifts for mini-jobbers who are also insured in a primary occupation.

Cross-Border Workers and International Employees

Employees who are socially insured in other EU countries must present an A1 certificate. These cases require manual review because the electronic data exchange only works within Germany.

Multiple Jobs

Those with two jobs pay social security contributions on both. However, the care allowance is only considered with the first employer (tax classes I-VI), not the second (tax class VI).

The reform does not change this but makes the calculation clearer.

Legal Basis and BMF Letter

The reform is based on the Credit Market Promotion Act of December 22, 2023. Originally, the change was supposed to come into effect in 2024, but it was postponed by two years to give software providers and administration more lead time.

The crucial document is the BMF letter of August 14, 2025 (reference number IV C 5 - S 2367/24/10002). It regulates:

• The calculation of the care allowance according to § 39b Abs. 2 Satz 5 Nr. 3 EStG

• The electronic data exchange between insurances and tax offices

• Transitional regulations for 2026 (hardship clauses)

Tax advisors and payroll officers should read the letter in full. It is freely available on the Federal Ministry of Finance website.

Outlook: What Comes After 2026?

The care allowance reform is a step towards a fully automated wage tax deduction procedure. In the medium term, the tax administration plans:

• Real-time Wage Tax Deduction: Instead of monthly preliminary notifications, companies could in the future pay wage tax immediately after each disbursement.

• Complete Data Matching: Not only insurance contributions but also business expenses, special expenses, and tax allowances could be automatically included.

• Elimination of Tax Declarations: When the tax office has all the data, it will eventually no longer need an annual declaration. Estonia is leading the way.

Until then, it is a long road. The care allowance 2026 is the first major test of whether digital data exchange works.

Conclusion: Act Now, Don't Be Surprised in January

Companies like DATEV, Lexware, SAP) are prepared. Critical issues will arise with smaller, custom-made solutions or outdated on-premise systems.

Use the remaining months: the care allowance reform seems at first glance to be a technical detail. In reality, it affects every employer in Germany. Those who do not adjust their software in time will produce incorrect calculations in January 2026.

The good news: Most large payroll providers (

• Order software updates (by December 2025)

• Test ELStAM retrieval

• Inform employees

• Conduct pilot bills

Those who are prepared will hardly notice the change. Those who miss it will have a problem in January 2026.

Sources

• BMF letter regarding the care allowance from 2026, reference number IV C 5 - S 2367/24/10002Federal Ministry of Finance (08/14/2025): '

• Haufe (2025): 'Care allowance in the wage tax deduction procedure from 2026'. haufe.de/taxes

• Smartsteuer Blog (2025): 'Payroll: What Changes in 2026'. smartsteuer.de/blog

• Deloitte Tax News (2025): 'BMF: Changes to the Care Allowance from 01.01.2026'. deloitte-tax-news.de

• Payroll-Info.de (2025): 'Care Allowance in the Wage Tax Deduction Procedure'. payroll-info.de

About project b.: project b. is already prepared for the ELStAM retrieval. Contact us for a demo.Care allowance reform 2026 prepared. Our software updates automatically and supports the full