What is the applicable tax rate? What should my employer withhold?

Question:

I am here in Holland for a job contract of 6 months. How do I determine the tax rate ?

Example: my 6 months total income will be € 40,000 which incur 10.45% + 27.65%.

Answer:

You mention that your salary incurs 10.45% and 27.65%.

In the Netherlands we have the wage tax and the income tax. The wage tax is withheld from your salary together with the premiums for the social security and is an advance levy for the income tax. The wage tax and premiums are calculated based on the “white tables” and on a monthly basis. An employer has only information of you for that specific month and can therefore not take other income or your personal situation into consideration. So although you have been in the Netherlands only for 6 months your employer must base their payroll on a full year situation.

This means that the applicable tax rate is determined based on the monthly salary times 12 months plus holiday allowance. Also it is assumed that you are liable for social security for the whole year. Consequence is that the rates your employer uses are not based on a salary of € 40,000 but on a salary of say € 80,000 which falls in the highest bracket of 51.75%. Based on this, maximum withholding is done, giving you the idea that your net salary is too low.

But as said the wage tax is an advance levy for the income tax. In the income tax return the actual situation can be declared. In the income tax return your salary will be € 40,000 (with a combined rate of 38.10.%: 10.45 + 27.65) and your (maximum) premium income will be reduced pro rata based on the period you were living or working in the Netherlands. So in the tax return the wage tax is corrected. Income tax is calculated and then reduced with the withheld wage tax, normally leading to a nice refund if you were not in the Netherlands the whole year.

This is how the system already works for decades. If you live in the Netherlands the whole year, the wage tax withholding should cover the income tax if there are not other special circumstances or deductions.

The applicable tax rates can be found here.

Be aware that these are just the rates. The calculated tax will be reduced with the applicable tax credits like for example the general tax credit and the employment tax credit.

Filing a tax return after the end of the year is certainly advised. Expatax can of course assist you with this. You can find our procedure on https://expatax.nl/taxreturn/.