A number of changes to rates, tax credits and the imputed return (box 3: savings and investments) will leave many people a little better off in 2021. Corporation tax is also being reduced slightly. As the rate in box 2 (substantial shareholdings) will increase in 2021, it may make sense to make an (extra) dividend payment this year. In this section we have presented the rates for you in handy tables.
Two-band system: rate in first band to be reduced
Since 2020 there have been just two bands for income tax purposes. This year (2020) the rate of income tax in the first band of box 1 stands at 37.35% and will be reduced slightly in 2021. The rate applicable in the second band will remain at 49.5%.
Income tax rate/national insurance contributions for 2021
| Taxable income of more than (€) | but no more than (€) | Rate for 2021 (%) | |
| 1st band | - | 68,507 | 37.10 |
| 2nd band | 68,507 | - | 49.50 |
The aim is to make only a small adjustment to the rate in the first band in 2022.
Income tax rate/national insurance contributions aim for 2022
| Taxable income of more than (€) | but no more than (€) | Rate for 2022 (%) | |
| 1st band | - | 68,507 | 37.07 |
| 2nd band | 68,507 | - | 49.50 |
Overview of changes to tax credits
Everyone is entitled to a general tax credit – a credit against income tax. This credit is dependent on your income: the lower your income, the higher the credit. The general tax credit will be increased in 2021.
| Tax credits | 2020 (€) | 2021 (€) |
Maximum general tax credit (< state pension age) |
2,711 | 2,837 |
| Employed person’s tax credit (maximum) | 3,819 | 4,205 |
| Young disabled person’s tax credit | 749 | 761 |
| Maximum income-dependent combination tax credit | 2,881 | 2,815 |
| Elderly person’s tax credit (maximum) | 1,622 | 1,703 |
| Single parent’s tax credit | 436 | 443 |
Rate applicable to substantial shareholdings in box 2
The rate in box 2 is currently 26.25%. It had already been decided last year that this rate would increase to 26.9% with effect from 2021. There will be no changes to this plan. The rate of 26.9% will apply to benefits from substantial shareholdings, such as dividends that are paid by a private limited company to a shareholder (director/major shareholder) and become part of his private assets, and capital gains on the sale of shares.
Tip: Due to the increase in the rate, it may be advantageous to distribute a dividend in 2020. Are you considering making a dividend payment in 2020? If you have benefited from coronavirus support measures, pay close attention to the relevant regulations, as under some of these measures you are prohibited from distributing a dividend.
Adjustment of rate in box 3
To help smaller savers and investors, the legislative proposal relating to the ‘Adjustment of box 3 Act’ proposes a change to the tax on imputed return on investment in box 3.
The system used to determine returns will not change in 2021. The tax payable will therefore continue to be calculated on the basis of three bands. However, the tax-free allowance per person will be increased from € 30,846 in 2020 to € 50,000 in 2021.
In 2021 the bands will be as follows:
Band 1 will run from € 50,000 to € 100,000 (2020: € 30,849 to € 103,643). Band 2 will run from € 100,000 to € 1,000,000 (2020: € 103,643 to € 1,036,418). Band 3 will start from € 1,000,000 (2020: from € 1,036,418).The rate in box 3 will increase to 31% (currently 30%).
Please note: The increase in the tax allowance will not affect your entitlement to allowances, such as care allowance, housing allowance or the child-based budget. An asset threshold of € 31,430 (2021) will apply to these allowances.
For some time now bringing the tax on imputed return on investment more closely into line with the actual return achieved has been considered a desirable step. At the moment an external study is therefore being prepared to look into the practicalities of introducing a tax that is aligned with the actual return on assets. The government aims to have the results available in the spring of 2021.
Change to corporation tax rates
With effect from 1 January 2020 the lower rate of corporation tax was cut from 19% to 16.5%. The higher rate remained at 25%. These rates were due to be reduced further to 15% and 21.7% respectively with effect from 1 January 2021. However, it was recently decided that the higher rate will not be cut. This will therefore remain at 25%, although the lower rate will still be reduced to 15%.
Adjustments will also be made to the bands. In 2021 the 25% rate will only apply to profits in excess of € 245,000 and in 2022 to profits of more than € 395,000.
The corporation tax rates in 2021 and 2022 will be as follows:
| Corporation tax | 2020 | 2021 | 2022 |
| Profit | 16.5% Up to € 200,000 |
15.0% Up to € 245,000 |
15.0% Up to € 395,000 |
| Profit above these thresholds | 25.0% | 25.0% | 25.0% |
Innovation box
At present, profits resulting from innovative activities are taxed at 7% for corporation tax purposes, subject to certain conditions. This rate is increasing to 9% in 2021. The innovation box was introduced as a tax incentive to encourage entrepreneurs to carry out innovative research. To be eligible for the innovation box, you need R&D declarations, which you can apply for at RVO.nl for research and development work.
16 September 2020