Taxes. You can't avoid them. But everyone naturally wants to keep as much as possible of their happily or hard-earned money in the bank. As a Director-major shareholder (DGA) or self-employed person (ZZP'er), you try to keep your income tax return as low as possible. Which is logical, because you already pay often enough.
One way to do this, the specifics of which many people don't know, is utilising your annual contribution margin (jaarruimte). Contributing this year not only provides you with a cashback on this year's tax return next year, but it also has two other important advantages. But what exactly is the annual contribution margin? How do you utilise it? And why do you have to arrange it before the end of the year to avoid missing out on your cashback? You can read about that in this blog.
The annual contribution margin (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 self-employed individuals (ZZP'ers) and Director-major shareholders (DGA's) who do not automatically accrue a pension through an employer. The annual contribution margin is calculated based on your income and pension accrual from the previous year. By using your annual contribution margin, you not only accrue a pension for later, but you also pay less tax now. The amount you contribute is deducted from your taxable income.
It will be clear to you by now what the advantage of utilising your annual contribution margin 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. On the first €75,518 of your annual income, you pay 36.97% tax. On everything you earn above that amount, you pay 49.50% tax.
When you utilise your annual contribution margin, this lowers your total income amount. As a result, you can fall into the lower tax bracket.
The annual contribution margin for 2024 is calculated based on your 2023 income. First, you deduct the AOW-franchise (this is €17,545 for 2024) from your gross income. On the remaining part, you are allowed to contribute 30% as the annual contribution margin.
Suppose you earned €40,000 in 2023, you can calculate your annual contribution margin for 2024 as follows:
You can therefore contribute a maximum of €6,736.50 tax-free to your pension in 2024. When you do this, you reduce your tax return for 2024 by that amount.
Imagine that you earned €80,000 in 2024. Then your taxable income after deduction of your annual contribution margin 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.
Not only do you pay less tax now by utilising your annual contribution margin, but the money you contribute will also be taxed at a lower rate after your retirement. What that rate will be is not yet known.
In 2024, you must pay wealth yield tax on all your savings above €57,000 if you do not have a fiscal partner, and above €114,000 if you do have a fiscal partner. The money you contribute to your pension is exempt from this. Now and forever. It is therefore more advantageous to put your capital into a pension pot than to put it into a savings account.
If you do not utilise your annual contribution margin, you miss out on a number of important advantages that can have a direct impact on your financial situation now and in the future. By not utilising your annual contribution margin, you lose the opportunity to reduce your taxable income for 2024. This means you pay more tax than necessary. The tax advantage you miss out on is an 'extra income' you could have reinvested or saved for your future. Or perhaps could have used as holiday money.
The compound effect, or interest on interest, is a powerful aspect of pension accrual. By not making maximum use of your annual contribution margin, you accrue less pension capital. This can mean that you have less financial room later in life than would have been possible or that you are dependent on work income for longer. By utilising your annual contribution margin annually, your capital 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 contribution margin this year, it can be carried over to subsequent years under the name 'reserveringsruimte' (catch-up contribution margin). However, this has limitations. For example, there is a limit on how much you can carry over and for how long, meaning it is still advantageous to utilise your annual contribution margin as quickly as possible.
Timely utilisation of your annual contribution margin is essential for every DGA or ZZP'er who takes their financial future seriously. By actively using your annual contribution margin, you not only minimise your tax burden in the short term, but you also build a sturdier and fiscally more advantageous pension for later. You still have until the end of the year to utilise your annual contribution margin and reduce your taxable income for 2024 and give your pension pot an extra boost.
Therefore, take the time today to calculate your annual contribution margin and make the necessary deposits before the end of the year. With this, you ensure yourself a tax cashback and a better return on your pension. Every missed opportunity to utilise your annual contribution margin is a lost opportunity for tax savings and capital growth. Take control of your financial future; act now to reap the rewards later.