Tax-free allowance

What it means

The tax-free allowance reduces an individual’s tax base. The basic one is tied to the subsistence minimum and tapers to zero as income rises.

Besides the basic allowance there is one for a spouse where conditions are met, and a deduction for supplementary pension contributions up to a statutory cap.

The tax-free allowance is often confused with the tax bonus, but it works one step earlier. It reduces the tax base, so the saving equals only its amount multiplied by the tax rate. The bonus reduces the tax already calculated and, where the tax is low, can even be paid out in cash; any allowance above the size of the base is simply lost.

How it works in practice

For an employee the basic allowance is applied monthly on a signed declaration. The others are claimed once a year in the annual reconciliation or in a tax return.

The declaration can be in force with only one employer at a time. With several jobs, pick the one with the higher income so the allowance is actually used.

The allowance reduces only the tax base from employment and business income. A client whose main income beside a low wage is rental income cannot set it against the rent, so when preparing the return we split the partial tax bases correctly and tell the client in advance what tax on the rent to expect.

What to watch out for

Starting mid-year or holding several jobs often duplicates the monthly claim. The difference is settled in the annual reconciliation, and the employee reads it as a payroll error.

A recipient of an old-age pension above the amount of the basic allowance is not entitled to it. If they sign the employee tax declaration with the employer and leave the pension out, the allowance is applied monthly without entitlement and the whole difference is payable at once after the year ends.