Partial tax base

What it means

A partial tax base is the tax base for one type of an individual’s income. The Income Tax Act distinguishes several types: employment income, income from business and other self-employment, rental income, income from use of a work and other income. The base is worked out separately for each.

For employment, the partial base is gross pay less the employee’s insurance contributions. For business it is income less expenses, actual or flat-rate. For rental income an exempt amount applies and expenses are reduced proportionally.

The partial bases are added together, and only then are the tax-free allowances, such as the personal allowance or third-pillar contributions, deducted. Some income, such as dividends, stays out of the total because it has a separate tax base with its own rate.

How it works in practice

The order matters in practice. A tax loss from a business in the current year cannot be set against the employment base, so someone running a loss-making trade alongside a salary pays the full tax on the salary. That needs to be known in advance when planning expenses.

Where employment and a trade licence run side by side, the employer knows nothing of the business income, so it does not do the annual reconciliation and the taxpayer files a type B tax return. When preparing it we check that income, contributions and advances were carried correctly from the certificate of taxable income.

The partial base from business also drives the sole trader’s contributions for the following year. The choice between flat-rate and actual expenses therefore affects not only the tax but also the advances paid to the Social Insurance Agency and the health insurer.

What to watch out for

A common mistake is putting income under the wrong type, for example royalties among business income or one-off income on the wrong line. Expenses, rates and contributions differ, and correcting it after an audit is expensive.

The second mistake is forgetting foreign income. Even if it was taxed abroad, a resident must report it in the relevant partial base and relieve double taxation using the method in the treaty. Leaving it out can lead to additional tax and a fine.