Henk Pinkster
Miss Timmers
English
March 27, 2016
The Difference Between Income Tax in The United Kingdom and The Netherlands
Income tax is one of the most common things we have to face, but what exactly is income tax. I wanted to know something about income tax in the Netherlands, but I changed it a little bit and compared it with the United Kingdom. What are the differences between income tax and BTW in the Netherlands compared with income tax in the United Kingdom?
So what exactly is income tax? According to Investopedia it means:
An income tax is a tax that governments impose on financial income generated by all entities within their jurisdiction. By law, businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the government uses to fund its activities and serve the public. ("Income Tax Definition | Investopedia." 5)
You can see that income tax is being paid when you are within the jurisdiction of the government. Also, all persons that are within the jurisdiction of the government have to file an income tax return every year. Some unnecessary information for this paper is that it is the key source of funds for the government.
But what is the difference between income tax in the Netherlands and the United Kingdom? The Netherlands uses a box system. This system exists out of 3 boxes. The first box is being used for taxable income from work and home; the second box is being used for taxable income from substantial interest; the third box is being used for taxable income from savings and investment.
You pay tax according to the first box when you make profits from the business or professional activities; income from employment; result from other activities; income in the form of periodic payments; income from home; expenses for income provisions. In this paper, we will look at income from employment, but before we can compare it with the United Kingdom we need to know something about it.
According to esspatax.nl income from employment is:
This income consists of all income received in cash or in kind from present and former employment. Income from current employment includes wages and salaries, payments, gratuities, tips and certain periodic payments received under social security legislation (in cash), and the free use of a private car and free housing paid for by the employer (in kind). Income from past employment includes pensions and invalidity, disablement and unemployment benefits.
Salaries, wages and certain periodic payments received under the social security legislation are subject to wage tax. Wage tax is withheld by the employer and is essentially an advance levy on someone's final income tax assessment. ("Box 1: Income from Home and Work" 1).
So, income from employment is income in cash from present and former employment. Income from present/current employment includes wages and salaries. This part is the most interesting for me because I want to know taxation from income if you work and earn wages and salaries. Wages are being taxed by the employer with the use of wage tax. This is a levy on someone’s final income tax assessment according to espatax.nl.
Espatax.nl also mentioned this:
Under certain conditions, fixed amounts can be deducted for commuting to and from work. No other employment expenses are deductible with the exception of a sea days deduction for seafarers. Employers are allowed to pay untaxed reimbursements within certain limits.( “Box 1: Income from Home and Work” 1).
This mentions deductions that are being deducted from your gross income to generate your taxable income. Some of the deductions are the mortgage, traveling expenses etc.
The tax rates in box 1 are being shown in this image
Rates box 1 (work and housing) in 2016
Schijf Belastbaar inkomen Percentage
1 t/m € 19.922 36,55%
2 Vanaf € 19.923 t/m € 33.715 40,4%
3 Vanaf € 33.716 t/m € 66.421 40,4%
4 Vanaf € 66.422 52%
("U Hebt in 2016 De AOW-leeftijd Nog Niet Bereikt." 7).
So in the Netherlands income tax is being decided with the use of a box system. We are focused on box 1, because I want to know in which country the income tax is the most profitable.
Now we continue to income tax in the United Kingdom. In the United Kingdom, there are 2 ways to pay income over your salary. One way is Pay As You Earn (PAYE); the second way is Self-Assessment.
PAYE is a system that your employer or pension provider uses to take Income Tax and National Insurance contributions before they pay your wages or pension. Your Deductions are being decided by your tax code.
Another system is Self-Assessment. This system is being used if your financial affairs are more complex. You are paying income tax and national insurance through Self-Assessment. You will need to file a tax return every year.
The current income tax rates in the United Kingdom are as following according to gov.uk.
Income Tax rates
Tax rate Taxable income above your Personal Allowance
Basic rate 20% £0 to £31,785
People with the standard Personal Allowance start paying this rate on income over £10,600
Higher rate 40% £31,786 to £150,000
People with the standard Personal Allowance start paying this rate on income over £42,385
Additional rate 45% Over £150,000
("Income Tax." 4)
The second way to pay income tax in the United Kingdom is Income tax from savings and dividends. This type is quite simple as the rate is 20% on all earnings. If you have a low income you can ask for tax-free interest and if you have a high income you will have to pay more tax.
The English tax system is divided into 2 boxes. The first box is normal income tax; the second box is income tax from savings. The second box always has a basic rate of 20%, but it has some ways to pay less. The first box exists out of a table with basic rates. There are two ways to pay income tax in the first box. One way is PAYE; the second way is self-assessment.
The differences between income tax in the United Kingdom and the Netherlands are quite simple to see. One difference is the way to file tax return. In the United Kingdom people have 2 ways to pay tax. They don't have to file tax return if they use PAYE. They have to file tax return if they use self-assessment. In the Netherlands, everyone who falls within the jurisdiction of the government has to file tax return.
Another difference are the income tax rates. The Netherlands uses a table with 4 slices; the United Kingdom uses a table with 3 slices. Also, the tables are different. In the Netherlands, it goes from 0 till 19000 euros, while the rates in the United Kingdom are from 0 till 31000GBP(0 till 39000 euros at 28-3-2016 11:20).
Let’s compare both countries in a different way. We got a family with one father, a mother and a boy of 5 years old. The father works and the mother is home. He makes about 42000 euros(33153,96GBP) a year. They also got deductions in the Netherlands. One is mortgage (6% over 150000); the second one is for their child, which is 205 euros.
In the United Kingdom we don't have deduction, but allowance. This has to be deducted from your gross income. In this case, the allowance is 10600GBP
First, we're going to find out what the net. Income is in the Netherlands.
Gross income 42000 euros
Deductions 9205 euros
Taxable Income 32795 euros
Slice 1 36,55% from 19922 euros 7281 euros
Taxable income after slice 1 12873 euros
Slice 2 40,4% from 12873 euros 5200 euros
Taxable income after slice 2 0 euros
Total income tax after 2 slices 12481 euros
Your income tax is 12481 euros without payroll tax. This is 30.6% of your gross income.
Now we’re going to find out what the net. Income is in the United Kingdom
Gross income 33153,96GBP
Allowance 10600GBP
Taxable income 22553.96GBP
Slice 1 20% of 22553.96GBP 4510GBP
Total income tax ` 4510GBP
Your income tax is 4510GBP (5713 euros). This is 13.6% of your gross income.
My conclusion after calculating these 2 is as following: Income tax in the United Kingdom is less in the United Kingdom. The deduction is higher in the United Kingdom compared to the Netherlands. Also, the tax rates are lower in the United Kingdom. But this doesn't mean that this country is best to live in. There are other types of taxes that weren't mentioned in this paper.
Bibliography
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