Salaries in the Netherlands are quite complex due to the various taxes and deductions involved. One of these deductions is the labor tax credit. This is a reduction on your income tax, allowing you to pay less tax and keep more of your net income. Generally, the more you work, the higher this credit, up to a certain maximum. Read on to find out exactly how this works.
What is a labor tax credit?
Labor tax credit is a form of tax reduction applied to income from work (usually wages). The amount of the labor tax credit depends on the employment income: as the employment income increases, the labor tax credit rises up to a certain maximum, after which it gradually decreases.
The purpose of the labor tax credit
Now that you understand what sustainable employability entails, the question arises: why is it so important? The answer is twofold. First, in an era where the average age of the working population is increasing and the notion of ‘retiring at 65’ is becoming increasingly outdated, it is essential to ensure that your employees remain healthy and engaged throughout their entire careers.
The labor tax credit was introduced to make working financially more attractive. It encourages people to work or to work more hours, thereby increasing labor participation. The labor tax credit is designed to be most effective for lower incomes.
Numbers and Phase-Out
For 2024, the amounts and percentages are as follows:
- Employment income up to €11,490: 8.425% accrual
- Employment income from €11,490 to €24,820: 31.433% accrual
- Employment income from €24,820 to €39,957: 2.471% accrual
Up to a total labor tax credit of €5,532.
- Employment income from €39,957 to €124,934: 6.51% phase-out
The maximum phase-out is €5,532.
Adjustments in special tax rates
When applying special tax rates, such as for vacation pay or bonuses, the labor tax credit is also taken into account, just as it is included in the standard tables.
Special tax rates are designed to ensure that the total wage tax aligns as closely as possible with the calculation for income tax returns, as wage tax is a prepayment of income tax.
Conclusion
The labor tax credit is an important tool for stimulating employment by reducing the tax burden on workers, particularly those with lower incomes.
It is essential to apply the correct amounts and phase-out percentages to avoid surprises in income tax (phase-out). These accrual and phase-out percentages are also incorporated into the special tax rates.
