Salary conversion: When company pension schemes really bring more net benefits
Digital innovations - Tax-optimized investments - Individual consulting
Salary conversion: When company pension schemes really bring more net benefits
Digital innovations - Tax-optimized investments - Individual consulting
Direct comparison: Employer contribution, social security contributions and the subsequent contribution to the company pension scheme
Salary sacrifice schemes are often promoted with a single argument: a small net income results in a high contribution. This calculation holds true for the savings phase. However, the picture only becomes complete when the retirement phase is included, because you will later be fully responsible for paying health and long-term care insurance contributions on your company pension. This article compares both sides and also shows for whom company pension schemes are not worthwhile.
Salary conversion 2026: Up to what amount are taxes and social security contributions waived?
The legal entitlement to salary conversion is in § 1a BetrAVG This is enshrined in law. Every employee insured under the statutory pension insurance scheme has the option of requesting that a portion of their future gross salary be converted into a company pension scheme. This entitlement extends to up to four percent of the contribution assessment ceiling for the general pension insurance. In 2026, this ceiling was €101,400 annually, which corresponds to €8,450 per month.
This results in two boundaries that are often confused with each other in practice:
- Tax-free framework: eight percent of the contribution assessment ceiling according to § 3 No. 63 EStG, which in 2026 means up to 8,112 euros annually or 676 euros monthly.
- Social security-free framework: only four percent, that is 4,056 euros annually or 338 euros monthly.
Anything you convert between these two limits saves you income tax, but not social security contributions. This makes a significant difference to your net income.
The subsidy is applicable to the following implementation methods: direct insurance, pension funds, and pension trusts. For direct promises and support funds, there is no contribution ceiling; different regulations apply. A special rule applies to older contracts: Contributions that are still taxed at a flat rate according to Section 40b of the German Income Tax Act (EStG) are credited towards the tax-free allowance of eight percent. Anyone with a contract from before 2005 should therefore have their remaining allowance reviewed.
If you are unsure which implementation method is used in your company and how much framework is still available, it is advisable to consult the pension commitment before increasing the conversion.
Employer contribution and savings on social security contributions: How the net benefit develops
The real leverage of salary conversion lies not in the tax, but in the combination of three effects. First, the taxable gross income decreases. Second, social security contributions also decrease up to the four percent limit. Third, the employer must, according to Section 1a Paragraph 1a BetrAVG They pay a subsidy of 15 percent of the converted amount, insofar as they themselves save on social security contributions. This obligation has applied to all agreements since 2022, including existing contracts.
Based on the maximum amount exempt from social security contributions, this results in a statutory subsidy of a maximum of €608.40 per year in 2026. The wording in the law is important: 15 percent is a lower limit, not an upper limit. By converting a pension plan into a social security-exempt plan, the employer saves around 20 percent on contributions. Many companies therefore pass on more, sometimes up to the full savings amount, sometimes through collective bargaining agreements. This difference often determines the contract's return more effectively than the choice of fund.
An example from my practice: With a gross salary of €4,000 and a monthly contribution of €200, the combined marginal tax rate of income tax and employee social security contributions is approximately 45 to 50 percent, depending on tax bracket and church tax. Therefore, net income doesn't decrease by €200, but by around €100 to €110. Together with the statutory subsidy of €30, €230 ends up in the contract. Thus, a net contribution of approximately €105 becomes a savings contribution of €230 – this is the effect that is typically used to justify the purchase.
I recommend getting written confirmation of the actual amount of the employer's contribution before accepting an increase, as many promises only mention the legal minimum.
What costs arise elsewhere as a result of the salary conversion?
A reduced gross income has implications beyond just taxes. It also reduces all benefits that are based on the income subject to social security contributions. This particularly affects statutory pensions, sick pay, unemployment benefits, parental allowance, and disability pensions. Those who convert their entire pension allowance for years and become disabled during this period feel the impact doubly, as they simultaneously lack private insurance coverage.
With the statutory pension, the effect is moderate on paper, as one pension point currently yields around €40 per month. Nevertheless, this effect exists and must be factored into the calculation. In practice, the combination of tax savings, social security contribution savings, and employer contributions significantly outweighs this loss, provided the conversion remains within the social security-free limits and the contract is calculated cost-effectively. The outcome is contingent upon precisely this condition.
A special case concerns high earners: If your salary exceeds the contribution assessment ceiling for health insurance of €5,812.50 per month, you will not save any health and long-term care contributions by converting this portion of your pension, as you are not paying them anyway. However, during retirement, the company pension will be fully subject to contributions if you have statutory health insurance. What was once an advantage then becomes an additional burden, and this scenario is almost never shown in standard calculations.
A practically relevant question is what happens during periods without pay when converting the pension contributions. During parental leave, extended illness, or unpaid leave, no salary is paid that could be converted. The contract must then be made contribution-free or continued privately; in the latter case, without employer contributions and without tax advantages. Therefore, anyone planning a family should not convert the maximum possible amount, but rather choose a level that can be maintained through interruptions.
Therefore, do not calculate the conversion based on your current salary, but on the amount you can afford to bear even in a weaker year.
Retirement phase: Contributions to health and long-term care insurance on the company pension
Occupational pensions constitute a form of retirement benefit and are therefore subject to mandatory contributions to statutory health insurance. Unlike salary, you bear the full cost of these contributions yourself; there is no employer contribution. However, you will receive some relief through the tax-free allowance according to [relevant regulations/guidelines]. Section 226 Paragraph 2 SGB V. This amounts to €197.75 per month in 2026, which corresponds to one-twentieth of the reference amount of €3,955. Only the portion of the company pension exceeding this allowance is subject to health insurance contributions.
Two key limitations must be noted:
- Health insurance only: A tax-free allowance still applies to long-term care insurance. If this allowance is exceeded, the company pension is fully subject to contributions.
- Only those with compulsory insurance: Only pensioners with mandatory health insurance for pensioners can claim the tax-free allowance. Those with voluntary statutory health insurance are not entitled to it.
An example calculation for 2026: With a monthly company pension of €400, €202.25 is subject to mandatory health insurance contributions. At the general contribution rate of 14.6 percent and an average supplementary contribution of 2.9 percent, this amounts to approximately €35. Long-term care insurance contributions are levied on the full €400 at 3.6 percent, which corresponds to €14.40; for those without children, the rate is correspondingly higher at 4.2 percent. In total, this amounts to approximately €50, which is around 12 percent of the gross company pension. In addition, there is deferred taxation according to Section 22 No. 5 of the German Income Tax Act (EStG), which, however, is usually applied at a lower tax rate than during the working years.
With a lump-sum payment instead of a pension, there is no single tax burden; instead, the benefit is spread over ten years, with contributions of one hundred-twentieth per month. Privately insured pensioners, on the other hand, do not pay health and long-term care contributions on their company pension, making the calculation significantly more advantageous for them.
If you are about to retire, I recommend checking whether a pension or a lump sum is more advantageous in your case, as this decision cannot be reversed later.
For which persons is company pension scheme through salary conversion not worthwhile?
Salary sacrifice arrangements are not automatically advantageous. There are situations where they are financially or practically disadvantageous, and there are more examples of these than are typically portrayed in advertising:
- Low income with the prospect of basic income support in retirement: Occupational pension provision is taken into account when calculating basic income support, whereby, according to § 82 para. 4 SGB XII, only 100 euros plus 30 percent of the excess amount are protected, but not more than half of the standard benefit level 1.
- Costly contracts without substantial subsidies: If the employer only contributes the legally required 15 percent and the collective agreement has high closing and administrative costs, the cost advantage can be completely offset.
- Frequent changes of employer: Contributions from salary conversion are immediately non-forfeitable, however, every change leads either to a transfer in accordance with Section 4 of the German Occupational Pensions Act (BetrAVG), to exemption from contributions, or to private continuation without employer contribution.
- Requirement for flexibility: The accumulated capital is available no earlier than the age of 62; termination or pledging is not permitted. Anyone intending to purchase real estate or start their own business will be tying up financial resources here for the long term.
Using multiple contracts simultaneously is also a common mistake. The maximum amounts apply per employee, not per contract. Someone contributing to two direct insurance policies can only pay a total of €676 per month tax-free. Exceeding this limit results in additional taxation and potentially further contribution demands.
Before you upgrade an existing conversion or sign another contract, I should check the cost ratio of the existing tariff.
When is independent advice on salary conversion advisable?
Consultation is not equally important in every situation. Specifically, it seems advisable in four scenarios. First, if your employer offers a company pension plan and it's unclear how high the contribution will be beyond the statutory 15 percent. Second, if a contract is already in place and neither the cost ratio nor the guaranteed pension factor has ever been reviewed. Third, when changing employers, because the decision between transferring the plan, making it contribution-free, or continuing it privately has lasting consequences. And fourth, if your income is above the contribution assessment ceiling for health insurance, because in this case, the savings during the accumulation phase are lower and the burden during the retirement phase is higher than in the standard case.
As an independent lawyer, I compare the rates of several companies and calculate your specific situation across both phases, instead of simply showing the savings on your payslip. If you want to know the actual performance of your existing company pension plan, have it reviewed as part of my contract check.
Conclusion: Salary conversion is advantageous with employer contributions and cost-effective tariffs.
Salary conversion is advantageous in most cases, but not for the reasons usually cited. Decisive factors include an employer contribution exceeding the legally required 15 percent, adherence to the social security-free limit of €338 per month, and a plan with low effective costs and a reliable pension factor.
The advantage is offset by the full health and long-term care insurance contributions during retirement, which will only be reduced to a maximum of €197.75 per month from 2026 onwards, as well as reduced entitlements to pensions, sick pay, and parental allowance. A careful comparison of these factors will lead to a well-informed decision. Focusing solely on the savings on payslips only captures part of the equation.
Frequently Asked Questions (FAQ)
How much can I contribute through salary sacrifice in 2026?
In 2026, up to eight percent of the pension insurance contribution assessment ceiling will remain tax-free, which corresponds to €8,112 annually or €676 monthly. Only four percent, or €4,056 per year or €338 per month, is exempt from social security contributions. Contributions falling between these two limits result in savings on income tax, but not on social security contributions. The legally enshrined right to salary conversion according to Section 1a of the German Occupational Pensions Act (BetrAVG) extends up to the four percent limit.
How much does the employer contribute to salary conversion?
By law, 15 percent of the converted amount can be passed on to the employer if this results in savings on social security contributions. Based on the maximum contribution-free amount, this amounts to a maximum of €608.40 per year in 2026. The 15 percent is a minimum; many employers pass on their actual savings of around 20 percent. A review of your company's pension plan will show which regulations apply.
Is salary conversion advantageous despite the contributions incurred during the retirement phase?
Generally, yes, since tax savings, social security contribution savings, and employer subsidies combined have a significantly greater impact than the later premiums. This assumes a low-cost plan and a subsidy exceeding the statutory minimum. However, with very expensive contracts and an income above the income threshold for health insurance contributions, the calculation can be reversed. Therefore, both phases should be included in a joint calculation.
What tax-free allowance will apply to company pensions in 2026?
The tax-free allowance in statutory health insurance in 2026 is €197.75 per month, which corresponds to one-twentieth of the reference amount of €3,955. Only the portion of the company pension exceeding this amount is subject to contributions. This tax-free allowance is available exclusively to pensioners with mandatory health insurance for pensioners. This allowance does not exist for long-term care insurance, meaning that if the tax-free allowance is exceeded, the entire company pension becomes fully subject to contributions.
Are contributions due on a capital payout from a direct insurance policy?
Yes, a lump-sum payment is subject to social security contributions. For calculation purposes, it is divided over ten years, meaning it is factored in at one-hundred-twentieth of its value each month. During this period, health and long-term care insurance contributions accrue, whereby the tax-free allowance for health insurance is taken into account for pensioners with statutory health insurance. For tax purposes, the payment must be fully taxed in the year it is received, which can increase the impact of progressive taxation.
To what extent does salary conversion reduce my pension from the statutory pension insurance?
Since your gross earnings subject to social security contributions decrease, you will accrue fewer pension points. The impact is moderate; one pension point currently translates to roughly €40 in monthly pension benefits. Sickness benefits, unemployment benefits, parental allowance, and disability pensions are also affected. These side effects should be carefully considered when permanently converting the full pension allowance.
What happens to the contract if the employer changes?
Contributions from salary sacrifice arrangements are immediately vested, meaning the balance is preserved. For direct insurance policies, pension funds, and pension trusts, there is a transfer option within twelve months according to Section 4 of the German Occupational Pensions Act (BetrAVG). Alternatively, the contract can be made contribution-free or continued privately, but then without employer contributions and without any social security benefit. Which option is more advantageous depends on the specific plan and its cost structure.
Is the company pension taken into account when calculating basic income support?
Partly. According to Section 82 Paragraph 4 of the German Social Code, Book XII (SGB XII), €100 per month plus 30 percent of any income exceeding this amount remains exempt from being counted as income, with the upper limit being half of the standard benefit rate (level 1). The remaining amount is counted as income. For individuals with low incomes and who anticipate receiving basic income support, salary sacrifice is therefore often the less favorable option compared to simply building up assets.
Is salary conversion advantageous for high earners above the contribution assessment ceiling?
Caution is advised here. Those earning above the health insurance contribution assessment ceiling of €5,812.50 per month will not save on health and long-term care contributions by converting this portion of their pension. During retirement, however, company pensions are fully subject to contributions if they are covered by statutory health insurance. While the tax advantage remains, the overall calculation is significantly smaller and should be reviewed on a case-by-case basis.
When is independent advice on salary conversion advisable?
This is especially important when several factors coincide: an ambiguous employer contribution policy, an existing contract with an unclear cost ratio, an impending change of employer, or income exceeding the contribution assessment ceiling. Independent advice combines the savings and retirement phases and compares tariffs across multiple companies. This is crucial because effective costs and guaranteed pension factors can vary significantly between providers.
