Urgent: Don't forget to claim your tax refund on retirement

Taxation. There's no getting away from it. But, of course, everyone wants to keep as much of their happy or hard-earned pennies in the bank as possible. As a DGA or ZZP'er, you try to keep your income tax return as low as possible. Makes sense, since you already pay enough.

One way to do this, which many don't know the ins and outs of, is to use your annual margin. Depositing this year not only gets you a cashback next year on your return for this year, it also has two other important benefits. But what exactly is annual margin? How do you take advantage of it? And why should you take care of it before the end of the year to avoid missing out on your cashback? Find out in this blog.

What is annual margin?

Annual margin is a tax term that refers to the amount you are allowed to deposit tax-free into your third-pillar pension pot each year to supplement the regular pension you have built up. This is especially relevant for ZZP'ers and DGA's who do not automatically build up a pension through an employer. The annual margin is calculated based on your income and pension accrual from the previous year. By using your annual margin, you not only build up pension for later, but also pay less tax now. The amount you put in is deducted from your taxable income. 

What are the benefits of using your annual margin?

By now it will be clear to you what the benefit of using your annual margin is for your tax return this year. Namely, a cashback. But how exactly does this work? 

For your 2024 tax return, depending on your income, you may face two tax brackets. On the first €75,518 of your annual income, you will pay 36.97% tax. On everything you earn above that amount, you will pay 49.50% tax. 

When you use your annual allowance, it lowers the total amount of your income. This can therefore put you in the lower tax bracket.

The annual allowance for 2024 is calculated using your 2023 income. First you deduct the AOW deductible (this is €17,545 for 2024) from your gross income. Over the remaining portion, you may deposit 30% as annual margin.

Suppose you earned €40,000 in 2023 then you can calculate your annual margin for 2024 as follows:

1. Subtract the AOW deductible from your 2023 income: €40,000 - €17,545 = €22,455.
2. Calculate 30% of the remaining amount: 30% of €22,455 = €6,736.50.

So you can add up to €6,736.50 tax-free to your pension in 2024. When you do this, you will reduce your 2024 tax return by that amount.

Imagine you earned €80,000 in 2024. Then your taxable income after deducting your annual allowance will be €80,000 - €6,736.50 = €73,263.50. This means you pay 36.97% tax and the second tax bracket of 49.50% does not apply.

Lower state pension tax

Not only will you pay less tax now by using your annual margin, the money you put in will also be taxed at a lower rate after retirement. It is not known at this time what that rate will be. 

Wealth tax

In 2024, you must pay capital gains tax on all your savings above €57,000 if you do not have a tax partner and above €114,000 if you do have a tax partner. The money you put into your pension is exempt from this. Now and forever. It is therefore more advantageous to put your assets in a pension pot than to put them in a savings account.

What do you lose if you don't use the annual allowance?

If you don't use your annual margin, you are missing out on some important benefits that can have a direct impact on your financial situation now and in the future. By not using your annual margin, you are missing out on the opportunity to reduce your taxable income for 2024. This means you pay more tax than you need to. The tax benefit you miss out on is "extra income" that you could have reinvested or saved for your future. Or perhaps could have used it as vacation pay.

The compounding effect, or interest-on-interest, is a powerful aspect of pension accrual. By not maxing out your annual allowance, you build up less retirement assets. This can mean having less financial room later in life than would have been possible or a longer period of reliance on work income. By using your annual margin each year, your assets can grow exponentially. Best of all, you don't have to do anything to do it.

If you don't use your annual margin this year, it can be carried over to future years under the heading of "reserve margin. This only has limitations. For example, there is a limit on how much you can carry over and for how long, so it is still advantageous to use your annual margin as soon as possible.

Taking advantage of your annual margin as well?

Making timely use of your annual margin is essential for any DGA or ZZP who is serious about their financial future. By actively using your annual margin, you not only minimize your tax burden in the short term, but also build a more robust and tax-advantaged retirement for later. You still have until the end of the year to use your annual margin to reduce your taxable income for 2024 and add to your pension pot. 

Therefore, take the time today to calculate your annual margin and make the necessary deposits before the end of the year. By doing so, you will ensure yourself a tax cashback and a better return on your retirement. Any missed opportunity to use your annual margin is a lost opportunity for tax savings and capital appreciation. Take charge of your financial future; act now to reap the rewards later.