Income tax

In the Netherlands, the income tax is calculated on the income in three different ‘boxes’.

Box 1: Income from work and home ownership  
Income from work is your wages from employment, your profits from business activities and/or income from other activities. When added together, this constitutes your gross annual income. If you own a home of your own, this also has consequences for the income tax.

Box 2: Income from substantial interests
In box 2, your income from a substantial interest is taxed. This is applicable if, for example, you own more than 5% of the shares from a private limited company (bv) or public limited company (nv).

Box 3: Income from assets, the capital gains tax
Do you have assets, such as savings, shares or a second home? Are these assets worth more than the amount of any debts you may have? In that case, you have assets. Whether you have to pay tax on those assets, and how much you have to pay, depends on the amount. You don’t have to pay wealth tax on tax-free assets (up to €57,000 in 2024).

Income from work is your wages from employment, your profits from business activities and/or income from other activities. Your taxable income is calculated in this box.

Wage tax for employees
Wage tax is deducted from the gross salary for employees in salaried employment. The employer arranges this and gives you a payslip (every month) which states how much tax has been deducted from your salary and what, therefore, has been paid on your behalf to the Dutch Tax and Customs Administration. You receive an annual statement at the end of the calendar year. You need this for your tax return. Wage tax is an advance levy of the income tax in box 1, which is offset against the income tax return.

Profits from business activities
As a self-employed professional, you do not have an employer that pays your tax in advance. You have to set this aside from the profit that you make. You keep accounts, and you draw up the balance sheet and profit and loss account at the end of the year. You need these annual reports and accounts for your income tax return. However, the Dutch Tax and Customs Administration often imposes an advance levy on income tax already based on your income forecasts. This advance levy on income tax is offset against the tax return.

Income from other activities
This includes the income other than that which you made as self-employed professional and/or paid employee. Examples include one-off or occasional assignments/commissions. This is also referred to sometimes as ‘results from other activities’ (resultaat uit overige werkzaamheden) In that case, you are not referred to as an entrepreneur (ondernemer), but a ‘resultaatgenieter’ (recipient of income from other activities). You still have to pay tax on this income. You may deduct the costs that you incurred for this.

Deductible items and additional tax liabilities in box 1
Depending on your personal situation, you are entitled to certain tax-deductible items or you must apply additional tax liabilities. That means that your taxable income is usually lower in practice and you pay less tax. The most important deductible items are:

• Deductible items for an owner-occupied home, annuity premiums, business costs, healthcare costs and gifts.
• As a self-employed professional, you are entitled to deduction of costs (kostenaftrek), investment credit (investeringsaftrek) and SME profit exemption (mkb-winstvrijstelling) Do you also fulfil the hours criterion (urencriterium)? If so, you are also entitled to the self-employed deduction (zelfstandigenaftrek) and three years’ relief for new businesses (startersaftrek).

Example of additional tax liability: Do you have a car at your disposal from your employer? In that case, you add an amount to your income and you therefore pay slightly more tax ultimately.

After processing deductible items and additional tax liabilities, your taxable income will be left over. The tax on this is calculated ‘progressively’. This means that if your income increases, you will pay more tax in percentage terms. Your income will be split into ‘brackets’. You pay a different tax percentage in each bracket. Have you received income from different sources? In that case, there is a realistic chance that it will turn out with the annual tax return that you paid too much or too little tax during the year.

Anyone who has to pay income tax is entitled to tax credit. This is an amount that is deducted from the final amount of tax to be paid after all calculations in box 1, 2 and 3 have been made.

• General tax credit
• Employed person's tax credit for everyone who has an income from work

If you have received income from salaried employment on a monthly basis, tax credit has probably been offset against this already. You may only have this tax credit offset with one employer, however, otherwise you will receive too much tax credit and you will have to pay this back later on.

If you are employed, the employer will pay the healthcare insurance contribution. You still have to pay this on your income from business activities and income from other activities. The amount is determined with the income tax return. You will receive an assessment notice after the return.

One’s income can fall or rise sharply. In the event of a rise, your income may end up in a higher tax bracket. You will then pay more tax for part of your income. In that case, you can make use of the averaging scheme (middelingsregeling). You will then calculate an average income over three years. As a result of this, the (higher) income that falls under the higher tax bracket will fall and you will owe less tax.

As from 1 January 2023, the averaging scheme has been cancelled. The final period for which you can average is 2022, 2023 and 2024.