Every 1.8 euros exceeding the monthly salary of 1200 euros reduces the basic exemption by 1 euro (formula: 500 – 500 / 900 × (payment – 1200)).
If the monthly salary is 2100 euros, there is no basic exemption.
If an employer applies the monthly maximum basic exemption as laid down by law, the basic exemption rate will be reduced upon receipt of so-called unexpected or extra income. As a result, the person will be obliged to pay income tax upon submission of their tax return. Consequently, the expected tax refund the following March becomes an obligation to pay income tax instead.
The basic exemption can be applied on the basis of a person’s application by only one withholding agent for income tax (e.g. the employer or the Social Insurance Board). It must be specified in the application whether the withholding agent for income tax should:
1. calculate the basic exemption;
2. not calculate the basic exemption; or
3. calculate a specific amount of the basic exemption, e.g. 100 euros per month.
It would be wise for employers to review all of the applications submitted to date and check the wording of valid applications. Applications that include the employee’s wish for the employer to calculate the established basic exemption do not need to be rewritten provided that the person receives remuneration from only one employer and knows that they will not be earning any extra income. However, it would make sense to review the applications in which employees have provided a specific amount with regard to calculating basic exemption.
How to avoid having to repay income tax
Everyone should be able to calculate their income for the following period; based on the result, there are three options:
- having the basic exemption applied by the employer (if remuneration with one payer is less than 2100 euros) and paying additional income tax with the following year’s income tax return, if needed;
- calculating the approximate tax-exempt amount for the year and submitting an application to the employer to apply the tax exemption based thereon. In such a case, recalculation with the tax return for the year will be minimal or non-existent; or
- not applying the basic exemption on a continuous basis and still getting a refund of income tax with the tax return for the year.