Urgent: Don't forget to claim your tax refund on your pension

Tax. You can't avoid it. But everyone naturally wants to keep as much of their hard-earned money in the bank as possible. As a Director/Major Shareholder (DGA) or Freelancer (ZZP'er), you try to keep your income tax return as low as possible. Which is logical, as you pay often enough.

One way to do this, which many are unaware of, is utilising your annual allowance (jaarruimte). This year's contribution not only provides you with a cashback on this year's tax return next year, but it also has two other significant advantages. But what exactly is annual allowance? How do you utilise it? And why do you need to arrange it before the end of the year to avoid missing out on your cashback? You can read all about it in this blog.

What is annual allowance (jaarruimte)?

Annual allowance (jaarruimte) is a fiscal term that refers to the amount you are allowed to contribute tax-free each year to your third pillar pension pot, as a supplement to the regular pension you have accrued. This is especially relevant for freelancers (ZZP'ers) and DGAs who do not automatically accrue a pension through an employer. The annual allowance is calculated based on your income and pension accrual from the previous year. By using your annual allowance, you not only build up a pension for later, but you also pay less tax now. The amount you contribute is deducted from your taxable income. 

What are the benefits of utilising your annual allowance?

It should now be clear what the benefit of utilising your annual allowance is for your tax return this year. Namely, a cashback. But how exactly does this work? 

For your 2024 tax return, depending on your income, you may face two tax brackets. You pay 36.97% tax on the first €75,518 of your annual income. You pay 49.50% tax on everything you earn above that amount. 

When you utilise your annual allowance, this lowers the total amount of your income. This can therefore allow you to fall into the lower tax bracket.

The annual allowance for 2024 is calculated based on your 2023 income. First, you deduct the AOW franchise (which is €17,545 for 2024) from your gross income. You may contribute 30% of the remaining amount as annual allowance.

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Suppose you earned €40,000 in 2023, you can calculate your 2024 annual allowance as follows:

1. Deduct the AOW franchise from your 2023 income: €40,000 - €17,545 = €22,455.
2. Calculate 30% of the remaining amount: 30% of €22,455 = €6,736.50.

You can therefore contribute a maximum of €6,736.50 tax-free to your pension in 2024. When you do this, you reduce your 2024 tax return by that amount.

Imagine you earned €80,000 in 2024. Your taxable income after deducting your annual allowance then becomes €80,000 - €6,736.50 = €73,263.50. This means you pay 36.97% tax and the second tax bracket of 49.50% does not apply.

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Lower AOW tax

You not only pay less tax now by utilising your annual allowance, but the money you contribute will also be taxed at a lower rate after your retirement. It is not yet known what that rate will be. 

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Wealth tax

In 2024, you must pay an investment yield tax (vermogensrendementsheffing) on all your savings above €57,000 if you do not have a tax partner, and above €114,000 if you do have a tax partner. The money you contribute to your pension is exempt from this. Now and forever. It is therefore more advantageous to put your assets into a pension pot than to keep them in a savings account.

What do you lose if you do not utilise your annual allowance?

If you do not utilise your annual allowance, you miss out on a number of important benefits that can have a direct impact on your financial situation now and in the future. By not utilising your annual allowance, you miss the opportunity to lower your taxable income for 2024. This means you pay more tax than necessary. The tax benefit you miss out on is an 'extra income' that you could have reinvested or saved for your future. Or perhaps used as holiday pay.

The compound effect, or interest-on-interest, is a powerful aspect of pension accrual. By not making maximum use of your annual allowance, you build up less pension capital. This may mean that later in life you have less financial freedom than would have been possible or that you are dependent on earned income for longer. By utilising your annual allowance annually, your assets can grow exponentially. And the best part is that you don't have to do anything for it.

If you do not use your annual allowance this year, it can be carried forward to subsequent years under the name 'reserve space' (reserveringsruimte). However, this has limitations. For example, there is a limit on how much you can carry forward and for how long, making it still advantageous to utilise your annual allowance as quickly as possible.

Do you want to utilise your annual allowance too?

Timely utilisation of your annual allowance is essential for every DGA or ZZP'er who takes their financial future seriously. By actively using your annual allowance, you not only minimise your tax burden in the short term but also build a stronger and more fiscally advantageous pension for later. You still have until the end of the year to utilise your annual allowance, lower your taxable income for 2024, and top up your pension pot. 

Therefore, take the time today to calculate your annual allowance and make the necessary contributions before the end of the year. This ensures you a tax cashback and a better return on your pension. Every missed opportunity to utilise your annual allowance is a lost opportunity for tax savings and wealth growth. Take control of your financial future; act now to reap the rewards later. 

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