Personal income tax

What it means

Personal income tax is what an individual pays on their taxable income for a calendar year. The Income Tax Act divides it into employment income, income from business and other self-employment, rental income, income from use of a work, capital income and other income. A partial tax base is worked out for each type.

Tax-free allowances are deducted from the sum of the partial bases, and a progressive tax rate is applied to the result: a lower rate up to a threshold and a higher one above it. Some income has a separate base with its own rate, typically dividends.

The child tax bonus, any other bonuses and the advances already paid are then deducted from the computed tax. The result is either a balance to pay or an overpayment the tax office refunds.

How it works in practice

An employee whose only income comes from their employer usually files no return: the employer withholds the advances and does the annual reconciliation after year end. It is enough to sign the request in time and provide certificates, for example on mortgage interest or third-pillar contributions.

A sole trader, a landlord, someone with several employers at once or with foreign income files a type B tax return by the end of March of the following year, or by the extended deadline. The tax is paid together with the return.

We prepare clients’ returns from their books or tax records, compare flat-rate and actual expenses and check that all allowances and bonuses have been claimed. At the same time we work out what tax and contribution advances the result will trigger for the next year.

What to watch out for

A common mistake is assuming small occasional income need not be declared. Other income is exempt only up to a statutory amount and when conditions are met, and rental income or property sales have rules of their own. When in doubt, asking is cheaper than paying a fine.

The second mistake is relying on the annual reconciliation when the employee also had other income in the year, for instance from an agreement with another employer, rent or abroad. The duty to file a return then stays with them, and the employer will not fulfil it on their behalf.