How does the tax system work?
The tax system works with three boxes, each of which taxes a different type of income. Box 1 is about work and home and includes your profit from business. Box 2 deals with income from a substantial interest such as shares in your own private limited company. Box 3 looks at savings and investments and taxes your assets. You calculate the tax for each box separately and add them up. Then tax credits are deducted so you pay less. As a result, the system works the same way for everyone regardless of the source of income.
Box 1: Income from work and home
Box 1 taxes your business profits and any income from your own home. You pay tax in brackets so the rate increases on higher incomes. You reduce your taxable income with deductions such as business deductions or mortgage interest. The amount that then remains forms the basis for the brackets. As a result, the tax matches your actual income rather than your turnover. In 2025, there are three brackets that together determine how much tax you pay.
Tariffs 2025
In 2025, a first tranche applies up to €38,441 with a rate of 35.82%. The second bracket runs from €38,442 to €76,817 with a rate of 37.48%. The third bracket applies from €76,818 and has a rate of 49.50%. The first bracket also includes national insurance contributions, making this rate higher than the income tax-only rate. You pay the top rate only for the part of your income that exceeds the limit of the third bracket.
| Disc | Taxable income | Rate |
| Disc 1 | up to €38,441 | 35,82% |
| Disc 2 | €38,442 to €76,817 | 37,48% |
| Disc 3 | from €76,818 | 49,50% |
Tariffs 2026
In 2026, the tranche limits shift slightly. The first bracket then runs up to €38,883 and has a rate of 35.70%. The second tranche runs up to €79,137 and has a rate of 37.56%. From €791,37 onwards, the rate of 49.50% applies again. The adjustment creates slight shifts in the tax burden, making income in the first bracket slightly more favourable but middle income falling into the second bracket slightly earlier.
| Disc | Taxable income | Rate |
| Disc 1 | up to €38,883 | 35,70% |
| Disc 2 | €38,884 to €79,137 | 37,56% |
| Disc 3 | from €79,137 | 49,50% |
Sample calculation
An example clearly shows how tax by bracket works and how tax credits reduce your final amount.
- Taxable income is €50,000 after deductions
- The portion up to €38,441 falls in bracket 1 and is taxed at 35.82%
- The portion above €38,441 falls into bracket 2 and is taxed at 37.48%
- You add up the amounts from both tranches
- Thereafter, general tax credit and employment tax credit are deducted
- The remaining amount is the tax you pay in your situation
Tax credits
Tax credits reduce the amount you have to pay and are automatically deducted in the assessment. The general tax credit applies to everyone and gets lower as your income rises. The labour tax credit applies to everyone who works and is built up on lower and middle incomes and then phased out. The combination tax credit can apply if you work and have young children. Together, these rebates determine how much you ultimately pay yourself and play an important role in calculating your taxes.
Difference between payroll tax and income tax
The difference between payroll tax and income tax return is mainly about when you pay and who makes the remittance.
On payroll tax:
- Employer deducts tax and contributions from wages
- The employer remits this to the Inland Revenue on a monthly basis
- Tax credits are usually applied directly
On income tax:
- You pay yourself through your annual return
- There is no employer withholding amounts
- You pay in one lump sum or via a provisional assessment
Box 2: Significant interest
Box 2 applies to entrepreneurs who have an interest of at least 5% in a company. You pay tax on dividends you receive and profits on sale of shares. Box 2 only applies if you operate your own limited company and distribute profits to yourself. As a result, you use this box only for corporate forms with legal personality.
| Disc | Taxable income | Rate |
| Disc 1 | up to €67,804 | 24,50% |
| Disc 2 | from €67,804 | 31% |
Pricing
The rate in box 2 has two brackets. On the part up to €67,804, you pay 24.50%. On the excess, you pay 31%. The division ensures that smaller dividend distributions are taxed lower while higher distributions are taxed more heavily. The rates will remain the same in 2025.
Box 3: Savings and investments
Box 3 taxes your wealth above an exemption. Wealth consists of savings, investments and other assets minus debts. You pay tax on a calculated return on these assets. As a result, a fixed percentage rather than the actual return is taxed. The exemption prevents people with limited assets from paying tax.
Pricing
In 2025, the tax-free wealth is €57,684 per person. The rate on the calculated return is 36%. As a result, you only pay tax if your assets exceed the exemption. The calculation is done automatically when you file your tax return so you do not have to determine your own return.
