Is Overtime Tax-Free in 2025? – What the Coalition Agreement Says

Tax-free premiums instead of tax-free overtime 

The new coalition agreement between the CDU/CSU and SPD on tax-free overtime is above all about easing the burden on employees. Since the start of 2025, insurance contributions have risen sharply. For consumers that means less net pay. As compensation, overtime is now to be taxed differently. 

Markus Söder was enthusiastic at the press conference held by the Union and the SPD on 9 April 2025 and said in his speech: 

"We want to cut income tax for mid-sized companies, but also for the many hard-working people in this country. Overtime is tax-free and yes, the commuter allowance will be reduced, the hospitality tax will be reduced and in agriculture we are also sticking to the promises from the exploratory talks."

Söder's speech should not be taken literally, though: in fact this is not about the full hourly wage for overtime. Instead, the coalition agreement speaks of tax-free premiums, as we already know them from holiday and night shift premiums. Employees can, for example, give a premium of 50% on overtime worked. In an example, that means: 

This new law is meant to offer new advantages to employees and employers alike in future. Employees in particular benefit from a higher net income. Employers can offer a better incentive for extra hours and so increase staff motivation. But costs and benefits have to be weighed up as well. Because when employees work more overtime, staff costs rise for the employer. 

Making extra hours more attractive – for full-time staff 

Employees cannot work an unlimited amount of overtime. The daily maximum working hours have to be observed instead. That means employees may: 

• not work more than 8 hours a day. 
• not work more than 48 hours a week. 

In principle these maximum working hours may be exceeded, by 2 hours a day. But the law states that anything going beyond 8 hours of daily working time must be compensated with time off within 6 months. So the employer cannot simply pay for this working time, but has to allow the employee to take the hours off. If an employee already works 48 hours a week, they have no entitlement to the tax-free premium. 

But here too the coalition agreement proposes a number of changes: weekly maximum working hours are to be introduced instead of daily maximum working hours. That would not give more flexibility in planning working hours, but also makes it easier to build up overtime.

Tax-free overtime - a law for men?

Right from the start there has been debate about what this means for part-time staff. They do not reach the statutory maximum working hours as quickly. The announced law would therefore make it more attractive for employees to work part-time under their contract and to raise their net pay through untaxed overtime premiums. 

To prevent this, the CDU/CSU and SPD have added a clause to the coalition agreement stating that only extra hours are covered that go beyond full-time work as agreed in, or based on, collective agreements. 

The point of contention now, though, is that the rule would mainly benefit men.  Women work part-time far more often than men. According to the Federal Statistical Office 50 percent of women currently work part-time, compared with only 13 percent of men. So 50 percent of working women would have no entitlement to tax-free overtime at all. 

On this point the SPD and the CDU/CSU explain:

"We will create a new tax incentive for part-time employees to increase their working hours: where employers pay a bonus for increasing working hours, we will give these bonuses favourable tax treatment".

So that means if an employer grants a bonus for part-time staff, for example to ensure equality within the company, this should be tax-free as well.

Paying out overtime with the employer's consent 

There is another factor to add to the discussion: employees are only entitled to have their overtime paid out if 

1. the overtime is worked within the maximum working hours, 
2. the employer has ordered the overtime, 
3. and it is not laid down in company regulations, collective agreements or employment contracts that it is to be compensated with time off. 

So the employer has a certain amount of discretion. Premiums are also not mandatory. Some collective agreements already set out an obligation to pay overtime premiums, but there are no statutory requirements. If that is not added to the new tax rules on overtime, the likelihood of employees receiving tax-free overtime premiums also falls. 

When will tax-free overtime arrive? 

The 2025 coalition agreement between the CDU/CSU and SPD says: 

"We will immediately make overtime premiums tax-free [...]"

Even if that may sound at first as though overtime premiums are tax-free the moment the parties sign, we have to disappoint you. The coalition agreement is not a law in force, but a political promise.

For the tax exemption to take effect, a new law has to be passed. There are two ways of doing that: 

1. Legislative procedure: Measures that require legislation first have to go through the Bundestag and, where applicable, the Bundesrat. Depending on the complexity, that can also take weeks or months.
2. Immediate measures: In a few cases, regulations can also be decided more quickly. Whether that applies here is unclear.

So until overtime premiums really are tax-free, we will have to be a little patient.

Conclusion: making overtime tax-free – a real benefit or an empty promise? 

Easing the burden on employees by having them pay less tax is always a good incentive. Especially when it is about rewarding the hours employees work outside their contractual working hours. Even so, many questions remain open: how far do employees really benefit from tax-free premiums? Particularly where these are not required by collective agreement, the new law may only reach up to 50% of employees. 

In any case: overtime should always be recorded properly - otherwise disputes are inevitable. That works automatically with digital time tracking. The clockin app allows working hours to be recorded cleanly and, thanks to individual work schedules, overtime is documented automatically. Employees and employers can view the recorded hours in the working time account at any time. That way, arguments about overtime are a thing of the past.