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 it 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 2026, 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 and rates shift slightly. The first bracket runs up to €38,883 and has a rate of 35.75%. The second bracket runs from €38,883 to €78,426 and has a rate of 37.56%. From €78,426 onwards, the rate of 49.50% applies. Due to this adjustment, a larger part of income falls in the first bracket and the higher rate only comes into play later.
| Disc | Taxable income | Rate |
|---|---|---|
| Disc 1 | Up to €38,883 | 35,75% |
| Disc 2 | €38,883 to €78,426 | 37,56% |
| Disc 3 | From €78,426 | 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 part up to €38,883 falls in bracket 1 and is taxed at 35.75%.
- The part from €38,884 to €50,000 falls in bracket 2 and is taxed at 37.56%.
- Step 3 does not apply here because the income is below the limit.
- The tax from bracket 1 and bracket 2 is added together.
- After that, the general tax credit and employment tax credit are offset.
- The amount remaining after that is the tax you pay.
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 | Dividend income | Rate |
|---|---|---|
| Disc 1 | Up to €68,843 | 24,5% |
| Disc 2 | Above €68,843 | 31% |
Pricing
The rate in box 2 has two brackets. On the part up to €68,843, 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 2026.
Box 3: Savings and investments
Box 3 is about savings and investments. In 2026, the tax-free capital is €59,357 per person. Only assets above that will be taxed. The tax is calculated on a notional return.
Table box 3 key points 2026
| Section | Value |
|---|---|
| Tax-free assets | €59.357 |
| Tax rate | 36% |
| Fictitious return on savings | approximately 1.28% |
| Fictitious return on investments | circa 6% |
Pricing
In 2026, the tax-free wealth is €59,357 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.
