How is monthly wage tax calculated in The Netherlands?
AFAIK, in most European countries, the wage tax is calculated based on the total annual earning but is deducted by the employer from the gross salary and paid to the tax authorities in advance, on a monthly basis. I am trying to understand how.
Specifically, I am now interested in the Netherlands. This country has a simple wage tax calculation scheme (if compared to the neighbouring Germany, where tax depends on ones family situation):
Of the gross annual salary, the first ~20k are taxed at 36 %, the next ~37k are taxed at 42 %, all the rest is taxed at 52 %. So one can easily calculate the total annual salary tax due—provided that the annual salary is known. However the tax is paid monthly, i.e. before the total income is known. If the salary fluctuates each month (e.g. due to bonuses, or due to the appraisal in the middle of the year, or due to a job change), how do they calculate what I should pay monthly?
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It feels relatively easy because your employer takes care of the calculations and the consequences of your personal situation are sorted out later. But at the end of the day, the structure of the income tax is not particularly simple. Even without taking all the credits and deductions into account, the rules for employers fill a 300+ pages manual.
The general idea behind the system is that if you paid too much, you get it back at the end of the year. Same thing for all the deductions. So if you stop working during the year or have a large mortgage, you can get quite a bit of money back at the end of the year. But your employer does not take it into account to compute the monthly withholding so the answer to the “How do they calculate it in this case?” question is “They don't!”.
If you anticipate a large discrepancy in one direction or the other, you can however ask for a “voorlopige aanslag” (or “provisional assessment”). You would then receive money monthly, with the remainder to be paid later, after the final assessment.
Finally, if you your income fluctuates a lot from year to year, you can also ask the tax office to smooth it over three-year periods and to recompute the income tax accordingly. It can mean that money taxed in a higher tax bracket in one year gets moved to a lower one because you did not go over the threshold in another year, thus reducing the overall amount you have to pay. This is called middeling sterk wisselende inkomens.
Beyond that, the tax code makes liberal use of deductions and credits to define complex rules so that the notion that there are only three straightforward tax brackets might be a bit misleading. Where the German tax code has different tax brackets and/or rates, the Dutch tax code has a seemingly simple set of basic tax rates modulated by these deductions/credits.
As an example, consider the algemene heffingskorting. It's a tax credit between €700 and €2000 that every taxpayer gets (hence “algemene”). Because everybody qualifies for it, it means that the first €XXXX of income are effectively tax free (akin to the German Grundfreibetrag and similar rules in many countries). But it's not described in that way, you first compute the income tax based on the usual rates and then discount the credit (in German this is typically called an Absetzbetrag).
Then to make everything more complex, this tax credit varies depending on your age, your income or whether your partner earns money. And some of the rules (e.g. on fiscal partners) are being phased out and only apply to people who benefited from them in the past. So there is a lot more complexity in all this than meets the eye.
My own personal experience is of the United Kingdom rather than the Netherlands, but as your question asks about Europe I'll outline how it works for us just to give a general idea of the underlying principles. Note that the specific details may well vary in the Netherlands.
Tax authorities supply employers with a set of rules to calculate the "right" tax. For example for the UK some of the details can be found here, although most employers are now expected to manage this electronically instead of using these tables.
The typical principle behind these rules is that if your salary is the same over the year, you'll pay the same amount of tax each month. A simple way to achieve this is to allocate you 1/12th of each tax "band" each month, with anything unused being carried forward to the next month.
Another way of looking at that is that when calculating tax for e.g. month 6 in the tax year, you should get 6/12ths of each band, i.e. ~10K at 36%, ~18.5K at 42%, etc. In month 6, they look at your total taxable income in the tax year to date, and work out the total tax due for the year to date based on those bands. Then, they subtract the total tax already paid in previous months, to arrive at the tax to be paid for this month.
The total tax paid should "converge" to the right amount at the end of the year as in your final monthly payment you'll get all of each band and the calculation will be looking at the total pay you've received over the year.
Also, if your salary drops or you stop working part-way through the year it can lead to some tax being repaid to you over the months as the portions of the bands you get increases.
If you have more complicated tax affairs, you may need to fill in a tax return at the end of the year to get a final adjustment.
you can find details on how wag taxes are calculate here www.taxsummaries.pwc.com/uk/taxsummaries/wwts.nsf/ID/Netherlands-Individual-Taxes-on-personal-income
from 0 19,822 * 8.35%
19,822 33,589 * 1,655 + 13.85% of the excess
33,589 57,585 3,561 + 42.00% of the excess
57,585 13,639 + 52.00% of the excess
example 100000 --> tax=13639 + (100000-57585)*0.52= 35694,8 euro
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