Salaries tax and social insurance contributions
To avoid employees having to a pay a large amount of income tax at the end of the year, their employers withhold salaries tax from their salaries. Salaries tax is regarded as an advance payment of income tax.
Besides salaries tax, national insurance contributions, employee insurance contributions and income-related healthcare insurance contributions are also deducted from employees' salaries.
Salaries tax and national insurance contributions
Employees have to pay salaries tax on their earnings. An employee is someone who undertakes to work for an employer, where the employer pays the employee a salary and there is a relationship of authority between the employer and the employee. Sometimes a worker does not have an employment contract like an employee, but in other ways his or her relationship with the employer is similar. This is called 'deemed employment', and the employer has to withhold tax and contributions from the worker's pay as if he or she were an employee.
Everyone who lives or works in the Netherlands is covered by the national insurance schemes for state pension (AOW), surviving dependants (ANW) and exceptional medical expenses (AWBZ). The contributions are withheld by the employer from employees' salaries and remitted to the Tax and Customs Administration.
A separate scheme applies to artists and professional athletes.
Salaries tax and national insurance contributions withheld from all income components
Employers must withhold salaries tax and national insurance contributions from all income components paid to employees and remit them to the Tax and Customs Administration. Income components include salary, holiday allowance, overtime pay, end-of-year bonus and benefits in kind (e.g. a company car).
Work-related costs scheme
The work-related costs scheme allows employers to provide some benefits tax free, such as travel allowances, study costs, lunches and Christmas hampers.
Employers may provide such items tax free only if their total value is less than 1.5% of salary costs. If their total value exceeds 1.5%, the employer must pay 80% tax on the excess.
Employee insurance contributions
Employers also remit employee insurance contributions. These contributions pay for the unemployment benefit scheme (WW), the invalidity insurance scheme (WAO) and the work and income (capacity for work) scheme (WIA). Employers do not withhold these contributions from their employees' salaries but pay them themselves. The government sets the contribution levels twice a year, in January and July.
Annuity exemption for redundancy pay
The annuity exemption for redundancy pay was abolished on 1 January 2014. An annuity is a form of saving or investment in which the beneficiary receives fixed periodic payments. Transitional arrangements are in place for annuities granted before 1 January 2014 that qualified for the annuity exemption for redundancy pay.