Major changes to Dutch income tax

Major changes in Dutch income tax procedures are heading our way. Firstly, the box 1 income tax rates for incomes above €20,142 will be reduced as of 1st January 2019. In 2021 two tax brackets will disappear, meaning only two will remain.

Heading towards 'Flat Tax'

These rate adjustments reveal that the Cabinet is shifting towards a flat tax rate, or a taxation system with the same rate for everyone. This is not something that is currently ready for implementation. However, as of 2021 there will only be two tax rates, 37.05% and 49.5%.

Rate adjustments in 2019

The tax rates will start to change in 2019. The first tax bracket, applying to incomes up to €20,142, will increase by 0.1%-punt from 36.55% to 36.65%. The rates for the second and third brackets, covering incomes between €20,142 and €68,507, will decrease significantly, from 40.85% to 38.1%. Currently those earning over €68,507 pay a rate of 51.95%. Next year this will be reduced slightly to 51.75%.

What are the effects on net income?

Next year someone with an income of €35,000 will benefit from these changes by paying €380 less tax. Those on higher salaries will benefit more. Someone with an income of €65,000, for example, will enjoy a saving of €1,215. Those on an income of up to €20,000 will pay a maximum of €20 more in tax.

Two brackets as of 2021

From 2021 there will be just two tax brackets in box 1. A rate of 37.05% will apply to those on incomes up to €68,500. Incomes exceeding this amount will be taxed at a rate of 49.5%.

     Tax % in box 1

             Income of max € 20.142       Income of max € 34.404    Income of max € 68.507  Income > € 68.507

2018      36.55                                    40.85                                    40.85                                51.95

2019     36.65                                    38.10                                    38.10                                51.75

2021      37.05                                    49.50

Warning! The switch to two tax brackets in box 1 will only apply to those who are not yet entitled to AOW. For those entitled to AOW different rates will apply. Three brackets will continue to apply to those eligible for AOW.

Top rate frozen until 2024

Due to inflation and other factors, the tax rates will be indexed annually. Until 2024 this will not apply to the starting point of the top rate. This will remain frozen at the current level of €68,507. Taxpayers will therefore reach the top rate earlier. The expected result of this is that around 7% of taxpayers will be taxed at the highest rate. Without this freezing only 5.5% of taxpayers would be taxed at the top rate.