Three types of income: the box system

For income tax purposes 3 types of taxable income are distinguished. These income types have been classified into 3 so-called boxes:

Box 1: taxable income from employment and home ownership;
Box 2: taxable income from a substantial interest;
Box 3: taxable income from savings and investments;

Box 1:

• Taxable income from employment and home ownership;
• Wages, pension payments, social benefits;
• Income from other activities;
• Company car;
• Profits from business activities;
• Owner-occupied property;
• Negative expenditure on income insurance;
• Negative personal allowance;
• Periodic benefits.

Deductible expenditure in Box 1:

• Employee’s allowance
• Deduction of mortgage interest and other deductible expenditure;
• Expenditure on income insurance: annuities and other premiums;
• Offsettable losses from employment and home ownership;

Tax rate in box 1:

• Progressive, with a maximum rate of 52%

Box 2:

• Taxable income from a substantial interest
• Income from shares and profit-sharing certificates that are part of a substantial interest’’
• Income from the disposal of these shares and profit-sharing certificates
• Deductible expenditure.

Deductible expenses in box 2:

• Offsettable losses from a substantial interest

Tax rate in box 2:

• 25%

Box 3:

Taxable income from savings and investments

• Notional yield (4%) on capital (assets minus liabilities): the income from savings and investments

Deductible expenditure in box 3:

• None

Tax rate in box 3:

• 30%

Deductible items not related to any of the boxes:

• Personal allowance

Income in several boxes

If your income falls into two or three different boxes, its components will be treated and – where possible – taxed separately. This means that:
In general, every type of income falls into one particular box. Therefore, your income cannot be taxed twice.
Different tax rates are applicable to the taxable income in Boxes 1, 2 and 3.
Any negative income (loss) in one box cannot be offset against positive income in another box. A special facility applies to losses in Box 2.

Deductible expenditure

Deductible expenditure that is directly related to revenue in a particular box will reduce the income in that box.

Example:

The income from an owner-occupied property falls in Box 1. If you contracted a loan to purchase the owner-occupied property, the interest paid is deducted from the income from the property. Both the property and the loan pertain to Box 1.

Some types of deductible expenditure are not directly related to particular revenue. Examples of such expenditure are donations and extraordinary illness-related expenses. These types of deductible expenditure together constitute the personal allowance. The personal allowance can be deducted from your income in Box 1. Any remaining expenses can be deducted in Box 3 and Box 2.

Calculation of the tax owed

The tax you owe on the income in the three boxes is levied as one amount with any national insurance contributions owed. This amount is reduced by the tax credits to which you are entitled.
The box system and the tax-rates applicable do effect directly issues like personal pensionplans, saving-systems and mortgages. Please feel free to contact us if you would like to receive information specific for your situation.

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