Whether you are a newcomer or have been living in the Netherlands for a while, understanding taxes in the Netherlands can seem challenging. This short guide can help you understand how it works.
Understanding Box 1, Box 2 and Box 3
The Dutch tax system is based on the “Wet inkomstenbelasting 2001” (Income Tax Act 2001). This law introduced the so-called box system, which divides the types of income into three different categories: Box 1, Box 2 and Box 3 or Box 1, Box 2 and Box 3.
The purpose of this post is to provide a guide to help you better understand how the Dutch tax system works. From the types of income that fall under each box to the applicable rates and deductions.
The Netherlands income tax system
In the Netherlands, the income tax system is divided into three boxes. This segmented system allows for specific taxation based on the type of income. It is important to understand that income that falls into one box cannot be taxed in another, which helps to maintain a clear and organized structure.
Below you can see what each box consists of.
| Box 1/Box 1 | Box 2/Box 2 | Box 3/Box 3 |
Income from work and housing | Substantial participation income | Savings and investment income |
| Progressive rate | Fixed rate | Fixed rate on a fictitious yield |
Box 1: Income from work and housing
Box 1 is taxed primarily on income derived from employment, including wages, pensions and benefits from previous employment. If you are self-employed, your income will also be included here. In addition, your income from the ownership of your main home is considered in this box.
| The following revenues fall in Box 1 | |
| Salaries | Work-related income, such as salaries and pensions. |
| Business profits | Profits (income, minus expenses) from own business. It is evaluated if the individual has multiple clients, generates profits, has autonomy in decision making and assumes entrepreneurial risks. |
| Results of other work activities | It encompasses a wide range of activities that do not qualify as business earnings or wages, such as child care, odd jobs, among others. |
| Benefits and periodic benefits | Alimony, alimony, financial aid (uitkering), alimony, pension |
| Housing income | Surcharge for flat-rate homeownership (Bijtelling eigenwoningforfait) |
Housing income
Owning one’s own home is taxed with an addition (bijtelling) in box 1, the real estate income tax (eigenwoningforfait EWF). This corresponds to a percentage of the value of the dwelling according to the Real Estate Valuation Act (WOZ value or WOZ waarde). The higher the WOZ value, the higher the percentage. The WOZ value is determined annually by the municipality. The WOZ value of the previous year is used in the tax return.
The higher the WOZ value, the higher the eigenwoningforfait EWF. If you want to know more about the WOZ you can read the post How to take advantage of a high WOZ?
As a homeowner you can deduct the interest and mortgage costs for your own home (eigenwoningschuld EWS). The mortgage interest on the own home mortgage is commonly referred to as mortgage interest deduction (hypotheekrenteaftrek). This EWS interest and cost deduction is usually higher than the addition (bijtelling) of the EWF. Therefore, during the duration of the mortgage as a homeowner one usually has “negative own housing income”. This negative income from own housing reduces the taxable income in Box 1.
How much tax is paid in Box 1
The tax rates in Box 1 are progressive. This means that the higher your income, the higher the tax rate. These rates include both income tax and social insurance premiums.
For example, if you have an income of up to 35,000 euros, you pay a rate of 40%. For income between €35,000 and €70,000, the rate remains at 40%, and for income above €70,000, the rate increases to 50%. This tiered system ensures that everyone contributes fairly.
For more information on current tax rates and other important details, we recommend that you visit the official Belastingdienst website. There you will find specific and up-to-date information related to tax rates and other tax regulations that may affect your finances.
Heffingskortingen: What are they and how do they affect?
In Box 1, there are several deductions and tax credits that can reduce your tax burden. Among the most important are deductions for mortgage interest and general and employment tax credits (Heffingskortingen). In general, if you work, you are entitled to both of these deductions.
What if I don’t work? Don’t worry, you are still entitled to the general discount. This can be useful if, for example, you have box 3 income or receive a late payment.
Why do we talk about the “tax-free amount”? Many people talk about the “tax-free amount” and say that no tax is paid on the first few thousand euros. This has to do with discounts. If, for example, you have to pay €1,500 in income tax, but you get a discount of €2,000, you don’t have to pay anything. But watch out! You cannot receive more money than you are entitled to. In other words, you cannot get a discount greater than the amount of tax you must pay.
Box 2: Income from significant shareholdings
Box 2 or Box 2 focuses on income from significant shareholdings. This includes dividends and income from the sale of stock if you own at least 5% of a company. The definition of “significant interest” is crucial, especially for business owners, as it determines how your investment income will be taxed.
Definition of significant shareholding: A person is considered to have a significant shareholding if he/she owns at least 5% of the shares of a company, generally a BV, equivalent to a limited company.
How much tax is paid in Box 2
The tax rates in Box 2 are fixed, but have seen some recent changes. Starting in 2024, there are two tiers: a 25% rate for income up to €70,000 and a 35% rate for income above that. These changes reflect an attempt to balance the tax burden between different income levels.
For business owners, it is crucial to plan ahead and understand how these rates will impact your finances. Proper management of your investments and dividends can help you minimize your tax burden.
In addition, capital gains from the sale of shares are included in this box. This means that, in addition to dividends, any gain from the sale of your shares will also be taxable.
You can see the current rates in the link below:
Box 3: Savings and investment income
Box 3 covers savings and investment income, taxing assets less debts. This includes property, financial investments, cash savings, etc. . This includes bank accounts, stocks, bonds and other forms of investments. If the investment is on regulated platforms such as Degiro or Trade Republic it will be pre-filled on your tax return.
Some points to keep in mind are:
Wealth tax: Net assets are taxed at a fixed rate, regardless of actual income. In other words, they are taxed based on a fictitious return, regardless of whether a return is actually earned. This is going to change in the next few years but the government has not yet announced exactly how it will be.
- Wealth tax: Net assets are taxed at a fixed rate, regardless of actual income. In other words, they are taxed based on a fictitious return, regardless of whether a return is actually earned. This is going to change in the next few years but the government has not yet announced exactly how it will be.
- Exemptions and deductions: An exemption is allowed for a certain amount of assets, known as heffingsvrij vermogen, and certain “green” investments may be exempt or have tax benefits.
The tax-free amount is:
| Year | Tax-free amount (heffingsvrij vermogen) without fiscal partner | Tax-free amount (heffingsvrij vermogen) with tax partner |
| 2025 | € 57.684 | € 115.368 |
| 2024 | € 57.000 | € 114.000 |
| 2023 | € 57.000 | € 114.000 |
How much tax is paid in Box 3
The tax rates payable are:
| Year | Percentage |
| 2025 | 36% |
| 2024 | 36% |
| 2023 | 32% |
And the notional yields for 2024 are:
- Bank savings: 1.03%.
- Investments and other holdings: 6.04%.
- Debts: 2.47%.
Understanding the Dutch tax system is crucial for all newcomers. With this guide, we hope to have provided you with a clear and comprehensive overview of how Boxes 1, 2 and 3 work.
Source: Belastingdienst
