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

Taxes. You can't avoid them. But everyone wants to keep as much of their hard-earned money in the bank as possible. As a director-major shareholder (DGA) or self-employed professional (ZZP), you try to keep your income tax return as low as possible. Which makes sense, because you often pay enough already.

One way to do this, which many are not aware of, is to utilize your annual allowance. Investing this year will not only give you a cashback on your tax return next year, it also has two other important advantages. But what exactly is annual allowance? How do you use it? And why do you have to arrange it before the end of the year so you don't miss out on your cashback? You can read that in this blog.

What is annual margin?

Annual allowance is a tax term that refers to the amount you can deposit tax-free each year into your third pillar pension pot, as a supplement to the regular pension you have accrued. This is especially relevant for self-employed professionals and directors/major shareholders who do not automatically accrue a pension through an employer. The annual allowance is calculated based on your income and pension accrual from the previous year. By using your annual allowance, you not only build up a pension for later, but you also pay less tax now. The amount you invest is deducted from your taxable income. 

What are the benefits of utilizing your annual allowance?

It will now be clear to you what the advantage of using your annual allowance 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 have to deal with two tax brackets. You pay 36.97% tax on the first €75,518 of your annual income. You pay 49.50% tax on everything you earn above that amount. 

When you use your annual allowance, this reduces the total amount of your income. This may move you into a lower tax bracket.

The annual allowance for 2024 is calculated based on your income from 2023. First, you deduct the AOW (state pension) franchise (which is €17,545 for 2024) from your gross income. You can contribute 30% of the remaining amount as annual allowance.

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

1. Deduct the AOW franchise 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, in 2024, you can deposit a maximum of €6,736.50 tax-free into your pension. When you do this, you reduce your tax return for 2024 by that amount.

Imagine you earned €80,000 in 2024. Your taxable income, after deducting your annual allowance, would 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

You not only pay less tax now by utilizing your annual allowance, but the money you invest will also be taxed at a lower rate after your retirement. It is not yet known what that rate will be. 

Wealth tax

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

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

If you don't utilize your annual allowance, you'll miss out on several important benefits that can directly impact your financial situation now and in the future. By not utilizing your annual allowance, you miss the opportunity to reduce your taxable income for 2024. This means you pay more tax than necessary. 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 as holiday pay.

The compound effect, or interest on interest, is a powerful aspect of pension accrual. By not making maximum use of your annual allowance, you accrue less pension capital. This may mean that you have less financial flexibility later in life than would have been possible, or that you are dependent on earned income for longer. By using your annual allowance every year, your assets can grow exponentially. And the best thing is that you don't have to do anything for it.

If you do not use your annual allowance this year, it can be carried over to subsequent years under the name 'reserve capacity'. However, this has limitations. For example, there is a limit on how much you can transfer and for how long, which means it is still beneficial to use your annual allowance as soon as possible.

Also utilize your annual allowance?

Using your annual allowance in a timely manner is essential for any DGA or self-employed person who takes their financial future seriously. By actively using your annual allowance, you not only minimize your tax burden in the short term, but you also build a stronger and more fiscally advantageous pension for later. You still have until the end of the year to use your annual allowance and reduce your taxable income for 2024 and further increase your pension pot. 

Therefore, take the time today to calculate your annual allowance and make the necessary deposits before the end of the year. This ensures you a tax cashback and a better return on your pension. Every missed opportunity to utilize your annual allowance is a lost opportunity for tax savings and wealth growth. Take control of your financial future; act now to reap the rewards later.