Taxes and Overtime in the Netherlands

How to calculate tax and why it is so high for overtime work

Our employees often ask why the overtime tax is so high and whether it makes sense to make overtime at all. Overtime pay depends on the CAO of the employeer or the company you actually work for. The tax paid on overtime pay is much higher than the tax paid on regular hours, and takes away practically half of the money earned.

In this article you will not find any ‘tricks’ that will allow you to bypass overtime tax, because they simply do not exist. We will explain the basic principles of calculating tax in the Netherlands, why the overtime tax seems so high, and whether it pays to do it.

Why is overtime pay heavily taxed?

Overtime is, in fact, taxed normally,  according to general tariffs. It seems high, because tax paid on regular earnings, stated on your payslip, as normale uren or toeslaguren, is exceptionally low. This is because of tax credits that reduce the amount of the tax you pay. So why do tax credits do not apply to overtime tax?

In short, tax credits are calculated on the yearly income basis. Yearly income is calculated on the basis of regular weekly income. Overtime is not taken into account because it is difficult to predict how much overtime a person will work in a year. Overtime, as well as vacation money and bonuses belong to a category of special payments, known in the Netherlands as bijzondere beloningen. Tax credits do not apply here.

Should I do overtime?

The answer depends on your priorities, current situation and future employment plans. The Dutch tax law is rather complex, so it is difficult to give a simple answer. Most likely, however, you will neither receive return nor will you have to pay extra. It can happen if your earnings change drastically and make you qualify for a lower or higher tax threshold.

Probably the best answer is cold calculation. Suppose someone works 40 hours a week for € 10/h gross and has a 125% overtime rate. Let’s call him Adrian. On a regular basis Adrian earns €400 gross per week, and pays taxes of €41.17. Netto he will earn €358.83 per week, which gives a net rate per hour of  €8.97.

For comparison, net earnings from 40h of overtime are €272.35, or €6.80/h. So if Adrian regularly does 5h of overtime a week, this is an extra €34 a week, €136 a month, and about €1700 a year.

That was the short answer.

Do you want to know how we calculated it?

Keep reading!

How do we calculate a tax on regular income?

In the Netherlands, the basis for calculating tax is gross annual income. That is why why we definitively settle tax once a year. But we pay an estimates tax amount with each weekly payment to avoid paying a big amount once a year.

This is how it works for Adrian with his 40h a week paid €10/h gross. In a week that’s €400 gross. In a year, which has 52 week, it’s €20800 gross.

 €10 x 40h x 52tyg = €20800

What taxes will Adrian has to pay depends on the tax tresholds Adrian’s earnings fall into. Officially there are 4 tax tresholds in the Netherlands.table with tax tresholds in the netherlands

So Adrian will earn €658 more than the maximum amount of the first threshold, which is €20 142.

€20800 – €20142 = €658

So Adrian will pay 36,55% from €20142 (first threshold), and €40,85% from €658 (second threshold). Yearly tax (without any tax credits) will amount to €7630,70, which divided by 52 gives €146,7 of tax per week.

36,55% x €20142 +  40,85% x €658 = €7630,70

 €7630,70 : 52tyg = €146,7

From the last amount tax credits will be deducted.

Tax Credits

Everyone who works in the Netherlands has the right to tax credits. There are two types of tax credits in the Netherlands: heffingskorting and arbeidskorting. Arbeidskorting applies to tax on work-generated income, heffingskorting applies to tax on income generated from work and other sources. The amount of the tax credit also depends on the gross yearly income.

heffingskorting

 

table defining general tax credit

arbeidskorting

 

table defining labour tax credit

How to calculate tax credits?

So Adrian’s yearly income is estamated at €20800, and the tax on this income is €7630,70.

To calculate heffingskorting we need the formula from the second row of the heffingskorting  table for persons earning between €20142 a €68507.

€2265 – 4,683% x (€20800 – €20142) = €2234

Arbeidskorting is easier. It’s €3249.

You just need to to deduct these two amounts from the yearly tax amount €7 630,70 to get €2147

€7630,70 – €2234 – €3249 = €2147

€2147 is the amount Adrian needs to pay for a year. Divided by 52 weeks, it is as low as €41,3.

€2147 : 52tyg = €41,3

That’s the theory. In practice employers often use tax tables where amounts of tax are precaltulated for every amount of salary. There are various tybes of labels: white, green, weekly, monthly, yearly, etc. The tax table that applies to your earnings is indicated on your payslip under the name loontijdvak. If you want to know more, read our article about the payslip.

Same tabele są do ściągnięcia i sprawdzenia na oficjalnej stronie Belastingdienst.

How to calculate tax on overtime?

The overtime tax is charged according to bijzonder tarief. How much bijzonder tarief do you pay? You can check that on your payslip. The amount of overtime tax also depends on the amount of gross annual income. A table for that you can find you the official website of Belasting. If, like Adrian you earn between €20143 and €33112 your bijzonder tarief will be45,53%.

If Adrian does on average 5 h of overtime a week he will earn €62,50 gross. 45,53% of this amount equals €28,45, which means that in the end Adrian will get €34.

125% x €10 x 5h = €62,5

45,53% x €62,5 = €28,45

€62,5 – €28,45 = €34,05

And so what?

Now when you know how the tax is calculated and what you can expect in March when you do your tax returen. If you work a full year, there won’t be much to refund, but if you work only a part of the year, you can expect some extra cash.

You can also decide for yourself if overtime is something you would like to do.

adrian