In the Netherlands, income tax is levied through the box system. This system divides different types of income into three boxes, each with its own tax rates and rules. This ensures that taxation is distributed more fairly, depending on the type of income a person has. In this article, we explain how taxation works per box and what it means for you as a taxpayer.
Box 1: Income from Work and Home
Box 1 is the most important and widely used box for most Dutch citizens. It applies to taxation on:
- Salary and wages
- Business profits
- Pensions and benefits
- Imputed rental value of owner-occupied homes (Eigenwoningforfait)
- Periodic payments
Tax Rates in Box 1
The tax rate in Box 1 is progressive, meaning that you pay more tax as your income increases. The rates for 2024 are:
- Bracket 1 (up to €75,518): 36.97%
- Bracket 2 (above €75,518): 49.50%
This means that lower incomes pay a lower percentage, while higher incomes contribute a larger portion of their earnings.
Deductions in Box 1
A key aspect of Box 1 is the possibility of deductions, such as:
- Mortgage interest deduction (for homeowners with a mortgage)
- Medical expenses (above a certain threshold)
- Donations to charities
- Public transport commuting expenses
These deductions reduce your taxable income, lowering the amount of tax you owe.
Box 2: Income from Substantial Interest
Box 2 applies to individuals who hold a substantial interest in a company, meaning they own at least 5% of a company’s shares. Taxable income includes:
- Dividend distributions
- Profit from the sale of shares
Tax Rate in Box 2
The tax rate in Box 2 for 2024 is as follows:
- 24.5% on the first €67,000 of substantial interest income
- 33% on the excess
Since director-major shareholders (DGAs) often pay themselves a low salary and compensate with dividends, the government has implemented rules to prevent tax avoidance, such as the mandatory use of a customary salary.
Box 3: Wealth (Savings and Investments)
Box 3 taxes private wealth, including:
- Savings
- Investments (such as stocks and bonds)
- Second homes and other real estate (excluding the primary residence, which falls under Box 1)
Tax Rate in Box 3
Tax in Box 3 is not levied on actual returns but on an assumed return. This means that the Tax Authority assumes you earn a certain percentage on your assets, regardless of actual profits or losses. This system is controversial and is set to be reformed in the future.
For 2024, the following brackets apply:
- Tax-free allowance: Up to €57,000 per person (€114,000 for fiscal partners) is exempt from taxation.
- Bracket 1 (up to €57,000 above the exemption): 1.93% assumed return
- Bracket 2 (€57,000 – €1,330,000): 4.37% assumed return
- Bracket 3 (above €1,330,000): 5.69% assumed return
A 32% tax rate is then applied to this assumed return.
Future Adjustments
Box 3 taxation is currently under revision. The fictitious return system has been criticized because it does not account for actual gains or losses. The government is working on a new system where taxation will be based on actual returns.
How Does the Tax Return Process Work?
Every year, you must file your tax return with the Tax Authority before May 1. This can be done digitally via Mijn Belastingdienst. The Tax Authority pre-fills many details, but you should always check and correct them if necessary.
Tax is often withheld in advance through payroll tax or preliminary assessments. If you have overpaid, you will receive a refund. If you have underpaid, you must pay the remaining amount.
Conclusion
The Dutch tax system operates with three boxes, each with its own rules and rates. Box 1 taxes income from work and home progressively, Box 2 taxes income from substantial interest, and Box 3 levies taxes on wealth. By making good use of deductions and exemptions, you can reduce your tax burden. Keep an eye on future changes, especially in Box 3, and ensure you file your tax return on time to avoid issues.