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 employer 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.
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.
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. He will get €365 net per week, and consequently, his net hourly pay will be €9,12.
Adrian’s net earnings from 40h of overtime will amount to €283,75, or €7,09 per hour. So if Adrian regularly does 5h of overtime a week, he will earn an extra €35,5 a week, €141,9 per month, and about €1844 per year.
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 threshold Adrian’s earnings fall into.
The Dutch tax system operates on 3 tax thresholds.
Adrian earned €20800 gross, so €658 more than the maximum amount of the first threshold, which is €20 142.
€20800 – €20142 = €658
Adrian will pay 36,65% taxes on €20142 (first threshold), and €38,10% on €658 (second threshold). Yearly tax (without any tax credits) will amount to €7632,74 which divided by 52 gives €146,8 of tax per week.
36,65% x €20142 + 38,10% x €658 = €7632,74
€7632,74 : 52tyg = €146,8
This amount seems high, because there are still tax credits, heffingskorting and arbeidskorting to be calculated and deducted from the amount above.
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.
Adrian’s yearly income is estimated at €20800, and the tax on this income is €7632,74.
To calculate heffingskorting we need the formula from the second row of the heffingskorting table for persons earning between €20384 and €68507.
€2477 – 5,147% x (€20800 – €20384) = €2455,59
To calculate arbeidskorting we need the formula from the second row for the yearly income between €9694 and €20940
€170 + 28,712% x (€20800 – €9694) = €3358,75
You just need to to deduct these two amounts from the yearly tax amount €€7632,74 to get the amount that Adrian will pay in taxes in 2019.
€7632,74 – €2455,59 – €3358,75 = €1818,40
€1818,40 is the amount Adrian needs to pay for a year in 2019. Divided by 52 weeks, it is as low as €35.
€1818,40 : 52tyg = €35
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.
Bijzonder tarief for Adrian’s earnings is 43,25%.
If Adrian does on average 5 h of overtime a week he will earn €62,50 gross. 43,25% of this amount equals €27,03, which means that in the end Adrian will get €35,47.
125% x €10 x 5h = €62,5
43,25% x €62,5 = €27,03
€62,5 – €27,03 = €35,47