How the new tax reform affects your wallet
The Government has just entered into an agreement with four parties from the Danish Parliament on a new tax reform. The first elements of the tax reform will be introduced from 2025, but several elements will not take effect until the following years. In addition to the tax reform, it will also become more financially attractive to work in the years around the state pension age.
The reform raises the employment deduction. And furthermore, Danes with incomes of DKK 618,400 to DKK 750,000 before labour market contributions (‘AM-bidrag’) will get a lower income tax. For Danes with an income of DKK 2.5 million before labour market contributions, an extra top-top-bracket tax of 5 percentage points is introduced.
The higher employment deduction will take effect from 2025, while the new income tax rates will take effect from 2026.
In the table you can see the total gain, which varies from DKK 1,200 to almost DKK 12,000, depending on your annual salary. If you have an annual salary of approximately DKK 2.75 million or more, you will have to pay more tax as a result of the top-top-bracket tax.
Here are the tax cuts
|
Income, DKK |
Gain, DKK |
|
|
200,000 |
1,200 |
|
|
300,000 |
1,800 |
|
|
400,000 |
2,720 |
|
|
500,000 |
2,720 |
|
|
600,000 |
2,720 |
|
|
750,000 |
11,810 |
|
|
1,000,000 |
11,810 |
|
|
1,250,000 |
11,810 |
|
|
1,500,000 |
11,800 |
|
|
2,000,000 |
11,800 |
|
|
2,500,000 |
11,810 |
|
|
2,750,000 |
310 |
|
|
3,000,000 |
-11,190 |
Note: It is assumed that 12 per cent of the income goes to pension savings and insurance.
Source: Velliv
How will the tax reform affect your pension savings?
If the agreement is implemented in its current form, as it is expected, pension savings will continue to be an attractive form of savings for all Danes. For a lot of people, the value of the tax deduction you will receive on your contribution to pension savings will be greater – or at least the same – as the tax you can expect to pay on the day your pension savings are to be disbursed.
For most people, everything will actually be just as before.
Annual salaries of up to DKK 618,400
If you currently have an annual income of up to DKK 618,400, you will get the same deductions by saving up for pension as before.
Annual salaries of DKK 618,400 to DKK 750,000
If you have an income of DKK 618,400 to DKK 750,000, your income tax will be reduced by 7.5 per cent. This means that your deduction on pension contributions will be slightly less valuable. However, the value of your tax deduction when you save up for pension will still be higher than the tax you can expect to pay on the day your pension savings are to be disbursed. Therefore, saving up for your pension still offers a favourable tax benefit.
A good tip is to consider depositing a little extra before the tax reform takes effect. This way, you will benefit from a larger deduction.
Annual salaries above DKK 2,500,000
If you have an annual salary of more than DKK 2,500,000, you have the prospect of paying top-top-bracket tax on your earned income. This makes saving up for pension more attractive than before, because your contribution gives a larger tax deduction, and you still have the prospect of the same or lower tax at the time of disbursement.
A good tip is to continue saving up for pension and possibly increasing your contribution when the tax reform is implemented.
Annual salaries of DKK 750,000 to DKK 2,500,000
If you have an annual salary of DKK 750,000 to DKK 2,500,000, everything will be the same as before. You will get a deduction in the top-bracket tax when you make contributions to annuity certain schemes or whole-life annuity schemes. And since you can expect to pay only bottom-bracket tax when your pension savings are to be disbursed, you will get a significant tax advantage by saving up for pension.
Get more out of working extra as a senior
The agreement also makes it even more attractive to work extra as a senior. In the last two years before reaching state retirement age, a special additional employment deduction of DKK 3,800 is introduced. And if you continue to work after reaching state pension age, the senior bonus (‘seniorpræmie’) will be increased by DKK 13,600 and DKK 8,000 in the first and second years after reaching state pension age, respectively. The new initiatives follow new regulations allowing state pensioners to work extra without offsetting in the state pension supplement.
Here are the Government's tax cuts |
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