All you need to know about Annual Allowance

Annual allowance (Jaarruimte) is an important concept for anyone who wants to get the most out of their pension accrual. It offers the possibility of receiving a tax benefit on the amounts you set aside for later. In this article, you will learn everything about the annual allowance, how to calculate it, and why it is so important for your financial future.

What is Annual Allowance (Jaarruimte)?

The annual allowance is the maximum amount that you can contribute tax-free to your pension scheme in a year. This maximum amount is determined by your income from the previous year. If you have accrued less pension - below the maximum amount - you can use this space to supplement your pension. 

Why is the annual allowance important to me?

The annual allowance is important because it helps you with your pension accrual, and you even receive some tax benefits for it. By using your annual allowance, you can reduce the amount of tax you pay. As a result, your pension pot grows, and you ensure a comfortable old age, without paying unnecessary tax. It is good to know that as soon as your pension pot is converted into a pension payment, you will still pay tax. However, that tax is lower than the tax you would pay now. 

How do I calculate my annual allowance?

Calculating your annual allowance can be complex, but fortunately, there are tools and calculators available to help you with this. These offer handy calculation aids to determine your annual allowance. But you can also do it yourself, of course. 

Steps to calculate your annual allowance:

Example 1: Calculating the annual allowance 

Suppose your income in 2024 is €50,000 and your pension accrual was €0. The annual allowance is calculated as follows:

1. Calculate your own gross income: Collect your annual statements or profit figures if you are an entrepreneur. For easy calculation, we will say that your income is €50,000.
2. Look up this year's AOW-franchise: This is the amount over which you may not accrue a pension; in 2024, this is €17,545. The reason for this is that this is already included in your AOW, so it is already well organised by the government. We call the result ‘the basis.’
3. Next, check the maximum pension accrual according to the tax authorities: You can find this on the website of the tax authorities (which you can find here). In 2024, this is 30% of your gross income. 
4. (Optional) Now look up your Factor A: You can find this on your Uniform Pension Statement (UPO). The UPO is the annual overview that you receive from your pension fund. In this calculation, you are not accruing a pension, so we calculate with €0. 

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Note, you only have this if you are already with a pension fund - for example, if you fall under a collective pension fund. Then you are already accruing a pension, and you may no longer have an annual allowance. 

5. Any annuity contributions: If you have already made an annuity contribution somewhere, for example, with Vive, you still need to deduct this in the formula. We set this to €0 for now, as we assume you are not accruing any extra pension.
6. Now calculate your annual allowance: For this, you use the following formula, ((Gross income − AOW-franchise) × Maximum pension accrual (%)) − (6.27 × Factor A) − any annuity contributions 

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Example: 

Your income is €50,000 and your Factor A is €0. 

The calculation is then: ((€50,000 −€17,545) × 30%) − (6.27 × €0) - €0 = €9,586.50

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7. Note the following points:Maximum annual allowance 2024 is set at €36,077Maximum income over which you may calculate the annual allowance is €137,800

Example 2: Optimally utilising your annual allowance 

You have the possibility to use your annual allowance from previous years - provided you have not yet fully utilised it. This is also called 'reserveringsruimte' (catch-up room/reservation room). With this, you can catch up on the unutilised annual allowance from the past ten years. Use the catch-up room for this (also called 'reserveringsruimte'). The maximum 'reserveringsruimte' in 2024 (catching up up to 10 years back) is €41,608

You can look up your catch-up room ('reserveringsruimte') here.

Benefits of utilising the annual allowance

• Tax benefit: You pay less tax on your contribution, meaning you keep more for later (make sure to file a tax return for this, of course).
• Higher pension accrual: You accrue more faster because there is more in the pot (money makes money), meaning you have more money available when you retire.
• Flexibility: Determining yourself how much and when you contribute. 

Tips for maximally utilising the annual allowance

1. Start calculating and planning on time.
2. Make use of online tools and calculators. You can use our calculator for this, check out the government's one here: Calculate your deductible annuity premium (from 2016) (belastingdienst.nl)
3. Consult a financial advisor for personal advice. That is always the best if you are unable to figure it out. 

Conclusion

The annual allowance is a powerful tool to improve your pension accrual. By making clever use of the possibilities offered by the tax authorities, you can ensure a financially carefree old age. Take the time to calculate your annual allowance and plan your financial future today!