Introduction
The Netherlands, also known as Holland, is the fifth-largest economy in the European Union, behind Germany, France, Italy, and Spain. However, on a GDP per capita basis, the Netherlands is the wealthiest of these five countries.
It is home to many of Europe’s largest companies, including Royal Dutch Shell, Unilever, ING, ABN AMRO, and Philips, as well as multinational corporations like IKEA. The country’s high level of economic freedom and widespread English proficiency make it a desirable destination for expats.
As a member of the Eurozone, the cost of living in the Netherlands is comparable to that of the United States and is 8% lower than the United Kingdom, according to WorldData.info. Additionally, average gross salaries in the Netherlands are 28% higher than in France, 24% higher than in the UK, and 10% higher than in Germany.
Taxes on Earned Income
Income from work in the Netherlands is subject to social security contributions and income taxes.
Social Security
Employers are required to contribute to the Dutch social security system. For permanent employees, this includes:
- Unemployment Insurance: 2.7% (7.7% for temporary workers)
- Disability Insurance: 7.03%
- Childcare: 0.5%
This results in a combined social security rate of 10.23% for permanent workers and 15.23% for temporary workers, with contributions capped at €58,880 of gross salary. For permanent employees, the employer's maximum social security contribution is €6,023 per year.
Employees, on the other hand, pay 27.65% of their gross salary in social security contributions, with a cap on contributions at an annual salary of €37,149. This breaks down as follows:
- Pension System: 17.9%
- Old-Age Insurance: 9.65%
- Widowhood Insurance: 0.1%
Consequently, the maximum annual contribution from an employee is €10,271, and when combined with the employer’s contribution, the total social security contribution can reach €16,294 annually.
Income Tax (Box 1)
Earned income in the Netherlands is subject to income tax in Box 1. The tax rates for 2023 are as follows:
- €0 to €37,149: 19.03%
- €37,149 to €73,031: 36.93%
- Over €73,031: 49.5%
Deductions that can reduce taxable income include:
- Mortgage interest for the primary residence.
- Employment-related expenses (e.g., commuting).
- Education expenses.
- Medical expenses.
- Child support and alimony.
- Contributions to life insurance.
- Donations to cultural organizations and NGOs.
- Some venture capital investments.
Tax Credits
Tax credits directly reduce the amount of tax payable. The two primary credits are the universal tax credit and the labor tax credit.
Universal Tax Credit:
- €0 to €22,661: €3,070
- €22,661 to €73,031: Decreasing as income rises
- Over €73,031: No credit
Labor Tax Credit:
- €0 to €10,741: 8.231% of taxable income
- €10,741 to €23,201: €884 + 29.861% of taxable income over €10,740
- €23,201 to €37,691: €4,605 + 3.085% of taxable income over €23,200
- Over €37,691: Decreasing until €115,295
Low and middle-income workers benefit the most from these credits, while high-income individuals see limited benefit.
30% Rule for Expats
Expats in the Netherlands may benefit from the 30% rule, which allows highly skilled workers recruited from abroad to reduce their taxable income by 30%. To qualify, expats must:
- Have lived at least 150 km from the Dutch border before relocation.
- Have a minimum salary of €55,659 before the 30% reduction, or €38,961 after.
For workers under 30 with a university degree, the salary threshold is lower: €42,309 before the reduction and €29,616 after.
The 30% rule applies for a maximum of 5 years.
Total Tax Burden on Labor Income
The overall tax burden on labor income depends on the combination of employer contributions, employee social security payments, and income taxes. For low-income earners, the effective tax rate is around 15%, while middle-income earners face rates between 30-45%, and high-income earners are taxed at close to 50%.
