AFAIK, in most European countries, the wage tax is calculated based on the total annual earning but is deducted by the employer from the gross salary and paid to the tax authorities in advance, on a monthly basis. I am trying to understand how.

Specifically, I am now interested in the Netherlands. This country has a simple wage tax calculation scheme (if compared to the neighbouring Germany, where tax depends on ones family situation): Of the gross annual salary, the first ~20k are taxed at 36 %, the next ~37k are taxed at 42 %, all the rest is taxed at 52 %. So one can easily calculate the total annual salary tax due—provided that the annual salary is known. However the tax is paid monthly, i.e. before the total income is known. If the salary fluctuates each month (e.g. due to bonuses, or due to the appraisal in the middle of the year, or due to a job change), how do they calculate what I should pay monthly?

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    I would really change the title to mention the Netherlands explicitly. There is nothing ‘European’ about it, France is completely different for example. – Relaxed May 14 '15 at 19:07
  • yes all eu countries have different local; tax laws and even eu employment law directives are applied differently from country to country – Pepone May 14 '15 at 20:34
  • @Relaxed: Before asking the question, I've researched on the internet. Information about "in most EU countries" comes from Wikipedia I believe. And yes, they do mention France as an exception. I lived in Germany before and there the calculation is similar: you first pay something per month and then apply for tax return next year. – texnic May 14 '15 at 21:41
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    @texnic Yes, it's completely accurate, sorry if I wasn't clear. But there are similar systems elsewhere in the world, very few EU rules and so many differences between countries so I though “Europe” was not the right scope for questions about this issue (by contrast, rules for the VAT are mostly set at the EU-level). – Relaxed May 14 '15 at 21:49

It feels relatively easy because your employer takes care of the calculations and the consequences of your personal situation are sorted out later. But at the end of the day, the structure of the income tax is not particularly simple. Even without taking all the credits and deductions into account, the rules for employers fill a 300+ pages manual.

The general idea behind the system is that if you paid too much, you get it back at the end of the year. Same thing for all the deductions. So if you stop working during the year or have a large mortgage, you can get quite a bit of money back at the end of the year. But your employer does not take it into account to compute the monthly withholding so the answer to the “How do they calculate it in this case?” question is “They don't!”.

If you anticipate a large discrepancy in one direction or the other, you can however ask for a “voorlopige aanslag” (or “provisional assessment”). You would then receive money monthly, with the remainder to be paid later, after the final assessment.

Finally, if you your income fluctuates a lot from year to year, you can also ask the tax office to smooth it over three-year periods and to recompute the income tax accordingly. It can mean that money taxed in a higher tax bracket in one year gets moved to a lower one because you did not go over the threshold in another year, thus reducing the overall amount you have to pay. This is called middeling sterk wisselende inkomens.

Beyond that, the tax code makes liberal use of deductions and credits to define complex rules so that the notion that there are only three straightforward tax brackets might be a bit misleading. Where the German tax code has different tax brackets and/or rates, the Dutch tax code has a seemingly simple set of basic tax rates modulated by these deductions/credits.

As an example, consider the algemene heffingskorting. It's a tax credit between €700 and €2000 that every taxpayer gets (hence “algemene”). Because everybody qualifies for it, it means that the first €XXXX of income are effectively tax free (akin to the German Grundfreibetrag and similar rules in many countries). But it's not described in that way, you first compute the income tax based on the usual rates and then discount the credit (in German this is typically called an Absetzbetrag).

Then to make everything more complex, this tax credit varies depending on your age, your income or whether your partner earns money. And some of the rules (e.g. on fiscal partners) are being phased out and only apply to people who benefited from them in the past. So there is a lot more complexity in all this than meets the eye.

  • Irrelevant comment: Andre Norton wrote a science fiction novel titled Voorloper. I don't think the term was ever defined in the book, and it never occurred to me to check whether it might be a real word somewhere...! – keshlam May 14 '15 at 21:28
  • I understand the general approach. But I am looking for a formula to derive the monthly withdrawal. I see that the wage tax fluctuates in my payslip and I fail to understand how it is calculated. Since it's done automatically, there should be a simple formula. – texnic May 14 '15 at 21:47
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    @texnic I will try to see if I can find some details. – Relaxed May 14 '15 at 21:50
  • So how does the monthly withholding get calculated? Is it just on the pay for that month? – Ganesh Sittampalam May 14 '15 at 23:05

My own personal experience is of the United Kingdom rather than the Netherlands, but as your question asks about Europe I'll outline how it works for us just to give a general idea of the underlying principles. Note that the specific details may well vary in the Netherlands.

Tax authorities supply employers with a set of rules to calculate the "right" tax. For example for the UK some of the details can be found here, although most employers are now expected to manage this electronically instead of using these tables.

The typical principle behind these rules is that if your salary is the same over the year, you'll pay the same amount of tax each month. A simple way to achieve this is to allocate you 1/12th of each tax "band" each month, with anything unused being carried forward to the next month.

Another way of looking at that is that when calculating tax for e.g. month 6 in the tax year, you should get 6/12ths of each band, i.e. ~10K at 36%, ~18.5K at 42%, etc. In month 6, they look at your total taxable income in the tax year to date, and work out the total tax due for the year to date based on those bands. Then, they subtract the total tax already paid in previous months, to arrive at the tax to be paid for this month.

The total tax paid should "converge" to the right amount at the end of the year as in your final monthly payment you'll get all of each band and the calculation will be looking at the total pay you've received over the year.

Also, if your salary drops or you stop working part-way through the year it can lead to some tax being repaid to you over the months as the portions of the bands you get increases.

If you have more complicated tax affairs, you may need to fill in a tax return at the end of the year to get a final adjustment.

  • This explanation on high-level sufficiently covers the situation in the Netherlands as well. For sample salary calculations in the Netherlands there are many websites, for example: e-prepay.nl/E-Prepay2015 – Karl May 14 '15 at 15:23
  • I am not sure it works the same way in the Netherlands. If you suddenly earn less, you typically get the money back at the end of the year, after submitting a tax return. I have not looked up the details, but I did not notice any “on the fly” adjustment to the monthly withholding when this happened to me (moved from full-time to part-time). If you fail to file a tax return within five years (it's not always mandatory), it's even possible that you would never get the money back. – Relaxed May 14 '15 at 19:49
  • @Relaxed thanks - if the question is changed to be specific to the Netherlands as you rightly suggest, it would probably make sense to delete this answer. Anyone should feel free to grab any bits of it they want for their own answers. – Ganesh Sittampalam May 14 '15 at 20:38
  • Thanks for the detailed explanation. What I am missing though is a simple formula to understand my payslip. Perhaps there is no simple formula though... I'll try checking with our accountant, though I believe the chances of getting a simple answer there are almost non-existent. – texnic May 14 '15 at 21:50
  • It might help to start with the first payslip in a tax year. Are the numbers consistent with getting 1/12th of each band? – Ganesh Sittampalam May 14 '15 at 21:52

you can find details on how wag taxes are calculate here http://www.taxsummaries.pwc.com/uk/taxsummaries/wwts.nsf/ID/Netherlands-Individual-Taxes-on-personal-income

from 0  19,822 *        8.35%
19,822  33,589 *        1,655 + 13.85% of the excess
33,589  57,585          3,561 + 42.00% of the excess
57,585                  13,639 + 52.00% of the excess

example 100000 --> tax=13639 + (100000-57585)*0.52= 35694,8 euro
  • forgot to mention that social security is not included. if you include that bands are still applicable but then taxation roughly is 36.5%--42%--52% as indicated above – Antonio Jul 29 '15 at 15:09

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