Income Tax return, Dutch tax system

Explanation of the tax structure

In the Dutch income tax, three types of taxable income are distinguished. These income types are classified into 3 so-called boxes:

- Box 1: taxable income from employment and home ownership
- Box 2: taxable income from a substantial interest
- Box 3: taxable income from savings and investments

In general, every type of income falls into a particular box. So you do not have to worry whether your income is taxed twice in two different boxes.

Box 1 Income from employment and home ownership

Box 1 is the box where the most types of income are taxed. The following types of income are taxed in Box 1: wages, pension payments, social benefits, income from other activities (revenues from freelance activities or for instance fees for (guest) lectures), your company car, profits from business activities, owner-occupied property, negative expenditure on income insurance, negative personal allowance, periodic benefits.

Wages, pension payments and social benefits
The employer or benefits company normally withholds the taxes that must be paid automatically as payroll tax. As said before, the payroll tax serves as a pre tax of the income tax.

Company car
If your employment comes with a company car, or you own a business and you have a company car, you gain a certain benefit by not having to finance your own car. This benefit is a percentage of the value of the car. The value of the car is determined as the original list price of the car in the Netherlands, including VAT and private motor vehicle and motorcycle tax. The percentage added depends on the amount of CO2 emissions of the car (in general between 14% and 25%). This will only be the case if you drive more than 500 km a year for private purposes. The percentage will be added to your total income in Box 1. If you are employed, the additional income is added automatically.

Deductible expenses
In Box 1, there are several deductible expenditures. For instance, if you own a house and you are living in that house, the interest paid for the mortgage and other expenses are deductible. Expenses made for income insurances are deductible as well. Study costs and costs for health care are deductible if they exceed a certain minimum level. Below, a short explanation is provided for the deduction that could occur when you own owner-occupied property in the Netherlands.

Owner-occupied property

If you have an owner-occupied property that is your main residence, the Dutch income tax system works as follows: First, you must add an amount of income to your income from Box 1 (up on 0,55% of the WOZ value of your house). This is for houses with a value below 1.000.000,- EUR. For houses with a WOZ-value above 1.000.000,- an additional 5.500 EUR is added. Second, the interest paid on the mortgage for the house is deductible for a maximum period of 30 years (if you bought the house after 2001). Periodic payments towards a ground lease or building and planting rights can also be deducted. When you bought a house in a certain year, more costs are deductible, such as notary expenses, taxation expenses etc. The amount of tax you have to pay depends on your total income in Box 1.

The more you earn in Box 1, the higher the percentage of tax you have to pay (see tax rates below).

Box 2 Income from a substantial interest

Box 2 affects your income from shares and profit-sharing certificates that are part of a substantial interest. 

Box 3 Income from savings and investments

Box 3 relates to your capital. Your capital is calculated as the value of your assets minus the value of you liabilities. Not all your assets are taxed in box 3. For instance, your owner occupied property that is your principal residence and the mortgage concerning this owner occupied property are taxed in Box 1.

Examples of assets are:
- Savings;
- Properties that are not your principal residence;
- Shares and other securities;
- Capital sum insurance that is not linked to the owner-occupied property that is your principal residence;
- Annuity insurance for which the premium cannot be deducted. Examples of liabilities:
- Personal loans;
- Study loans;
- Continuous credit, or a mortgage that is not used toward the owner
- Occupied property that is your principal residence.

Calculation of Tax

You calculate how much income tax and national insurance contributions you owe by applying the rates (see below) to taxable incomes. The income is treated per box and taxed per box as much as possible. This means the following:

  1. Each type of income falls into 1 box. Your income is therefore not double taxed.
  2. Different rates apply to the taxable income in boxes 1, 2 and 3.
  3. You cannot set off a negative income (loss) in one box with a positive income in another box.

You calculate how much tax you have to pay by applying the rates to the taxable income. You will then reduce the tax amount you have calculated by 1 or more tax credits.

Tax credits in income tax

A tax credit is an amount that reduces your income tax over a year. In your income tax return, you indicate that you meet the conditions of a discount. There are different tax credits and not all discounts apply to everyone. The discount amounts change every year.

Tax rates

Box 1 (work and home)

The rate for taxable income from work and home is an increasing rate with 2 brackets. You will pay proportionally more tax if your income increases.

In 2022, bracket 1 is taxed with 37,07% and applies to a taxable income up to €69.399. Al income in box one above this amount (bracket 2) is taxed with 48,50%. In the year that you reach the AOW pension age, you pay according to an adjusted rate.

Box 2 (taxable income from a substantial interest)

Your taxable income from a substantial interest is rated in 2022 with a tax percentage of 26,90%.

Box 3 (taxable income from savings and investments)

On your taxable income from savings and investments you pay 31% taxes in 2022. Do note, there has been a firm legal discussion about the way income from savings and investments are taxed in The Netherlands. You can read more about this here.

For all taxpayers in the Netherlands, a tax-free allowance does exist in box 3. For the year 2022, the tax-free allowance is € 50.650,- per person. If you are elder than 65, the tax-free allowance might be somewhat higher. If the total value of your assets exceeds the € 50.650,-, you are only paying taxes for the amount of assests that exceeds this amount. The value of the assets will be measured on January 1st. 

Suggested reading

The Dutch government provides with online information on filing taxes in English here. On this page of The Tax Authorities, all tax credits are listed, and you can read more about the current discounts. Lexlupa made an overview of tax benefits for individuals, entrepreneurs in income tax and corporate income tax. If you have any questions or want additional information; do not hessitate to contact us. We are happy to help!

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