Everything you need to know about Annual Room

Annual allowance is an important concept for anyone who wants to maximize their retirement savings. It allows you to get a tax break on the amounts you set aside for later. In this article, you'll learn all about annual margin, how to calculate it and why it's so important to your financial future.

What is Annual Room?

Annual margin is the maximum amount you are allowed to add tax-free to your pension plan in a year. This maximum amount is determined by your income from the previous year. If you accrued less pension - below the maximum amount - you can use this margin to supplement your pension. 

Why is annual leave important to me?

Annual margin is important because it helps you build your retirement; you even get some tax benefits for it. By using your annual margin, you can reduce the amount you pay in taxes. As a result, your pension pot grows and you ensure a comfortable old age without paying unnecessary taxes. Good to know, however, as soon as your pension pot is converted into a pension benefit, you will still pay tax. However, it will be lower than the tax you would pay now. 

How do I calculate my annual margin?

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

Steps to calculate your annual margin:

Example 1: Calculating annual margin 

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

1. Calculate your own gross income: For this, gather your annual statements or profit figures if you are an entrepreneur. For easy math, we'll say your income is €50,000.
2. Look up this year's AOW deductible: This is the amount over which you are not allowed to build up a pension, in 2024 it is €17,545. The reason is that this is already included in your AOW, so it's already nicely regulated by the government. We call the outcome "the base.
3. Next, check the maximum pension accrual following the IRS: You can find this on the IRS website (you can find it here). In 2024, this is 30% of your gross income. 
4. (Optional) Now look up your factor A: You'll find this on your Uniform Pension Statement (UPO). The UPO is the annual statement you receive from your pension fund.
   
   In this calculation, you don't build up a pension so we calculate with €0. 

Note, of course, you only have this if you are already with a pension fund - for example, if you are under a group pension fund. Then you are already building up and may no longer have annual margin. 

5. Possible annuity deposits: If you have already made annuity deposits somewhere, for example at Vive, then you still have to deduct this in the formula. We set this to €0 for now, because we assume you are not accruing any additional pension.
   
   
6. Now calculate your annual margin: To do this, use the following formula,
   ((Gross income - state pension franchise) × Maximum pension accrual (%)) - (6.27 × Factor A) - any annuity contributions 

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

7. Please note the following dots:
   Maximum annual margin 2024 is set at €36,077
   Maximum income over which you may calculate annual margin is €137,800

Example 2: Making the most of your annual margin 

You have the option of using your annual margin, from previous years - provided you haven't already used it to its full extent. We also call this reserve space. You can catch up on the unused annual margin of the past ten years. Use the catch-up space (also called reserve space) for this purpose. The maximum reserve margin in 2024 (catch up to 10 years back) is €41,608.

You can look up your catch-up margin (reserve margin) here.

Benefits of utilizing annual leave

• Tax benefit: You pay less tax on your deposit, leaving you with more for later (of course, file a tax return for this).
• Higher pension accrual: You accrue more faster because there is more in the pot (money makes money), therefore you have more money available when you retire.
• Flexibility: Decide how much and when to deposit. 

Tips for maximizing 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 one here: Calculate your deductible annuity premium (as of 2016) (belastingdienst.nl)
3. Consult a financial advisor for personal advice. That's always best if you're at a loss. 

Conclusion

Annual allowance is a powerful tool to improve your retirement income. By making smart use of the options offered by the IRS, you can ensure a financially worry-free retirement. Take the time to calculate your annual margin and plan your financial future today!