What are levy rebates (tax credits) and who is entitled to them?
In the Netherlands there is no standard tax-free income (basic exemption), such as in other countries. This means that, in principle, income tax is due on every euro earned. However, taxpayers may be entitled to so-called levy rebates (or tax credits) that reduce the income tax (and/or national insurance contributions) due. We will discuss the most common levy rebates and when you are entitled to these below.
Overview of levy rebates
Currently there are seven different levy rebates under the Income Tax Act 2001:
- The general levy rebate (algemene heffingskorting)
- The labor rebate / employment rebate (arbeidskorting)
- The income dependent combination rebate (inkomensafhankelijke combinatiekorting)
- The young disabled rebate (jonggehandicaptenkorting)
- The elderly rebate (ouderenkorting)
- The single elderly rebate (alleenstaande ouderenkorting)
- The rebate for green investments (korting voor groene beleggingen)
The most common levy rebates, namely the general levy rebate and the labor rebate are discussed in more detail below.
Tax and premium component
The levy rebates consist of a tax component and a premium component. If a person falls under Dutch social security rules, he or she is entitled to the premium part of the levy rebate. For the entitlement to the tax part it’s important where someone resides (in the Netherlands, within the so-called ‘circle of countries’, or in a third country). The entitlement to the tax component is discussed in more detail below.
General tax credit
Every resident of the Netherlands is entitled to the general tax credit. The general tax credit is calculated on the basis of the level of income and can therefore even amount to nil. In general, the higher the income, the lower the tax credit. Non-residents of the Netherlands are not entitled to the tax component of the general tax credit. If a non-resident is socially insured in the Netherlands, then this person is entitled to the premium part of the general tax credit.
General tax credit for the least-earning partner and reduction
Sometimes the least-earning partner of a taxpayer cannot (fully) implement the general levy rebate, because he or she is not working or does not earn enough. In case of fiscal partnership, the least-earning partner can claim the payout of (the remainder of) the general levy rebate.
Please note, this possibility of paying out the general tax credit is gradually phased out every year for partners born after 1962. In 2023, the payout for this group will no longer exist. Taxpayers born before 1 January 1963 are still entitled to 100% of the general levy rebate.
Every resident of the Netherlands who is employed (employed or self-employed) is entitled to the labor rebate. This rebate also depends on the level of income; if you have a high income there is no entitlement to this rebate. In addition to residents of the Netherlands, residents of the ‘circle of countries’ (EU / EEA countries, Switzerland and the BES islands) are also entitled to the tax part of the labor rebate. Residents of third countries (not being the Netherlands and not being ‘circle of countries’ ) are not entitled to the tax part of the labor rebate.
Payroll administration and payroll tax
From (almost) every employee in the Netherlands, wage tax is deducted on the Dutch salary slip. The withheld wage tax serves as a pre-levy to the final income tax due, which is calculated in the income tax return at year-end. If an employee is employed by one employer for the entire year and is not entitled to any (personal) deductions in the income tax return, the income tax due based on the annual income will normally be equal to the wage tax already paid via the salary administration during the year. In that case, no amount to be paid or refunded results from the income tax return. In order to ensure that the payroll tax is as close as possible to the income tax, the tax credits are in most cases already processed in the salary administration so that purely on labor income no additional refund results from the income tax return . The employee will then already receive a higher net salary each month by applying the “wage tax credit” (in Dutch: “loonheffingskorting”). We hereby note that the income dependent combination rebate does not fall under the wage tax credit. If there is an entitlementto this tax credit, a refund via the income tax return can of course be expected (assuming that this discount is not already paid monthly via the preliminary income tax assessment).
Request to apply payroll tax credit
Before the employment starts or on the first working day (before starting work), an employee must request the new employer to have the wage tax credit applied in the salary administration. This can be done by using the form “Model Opgaaf gegevens voor de loonheffingen”, which the Dutch Tax Authorities have made available for this purpose on its website. For more information about applying the wage tax credit, we kindly refer to our page about this topic.
If you have any questions about levy rebates please feel free to contact our specialists.