Annual reconciliation

What it means

The annual reconciliation of tax advances settles an employee’s tax for the whole year. The employer performs it at the request of an employee who had only employment income and is not obliged to file a tax return.

It applies the tax-free allowances, the child bonus and other entitlements not claimed monthly during the year. The result is usually a refund to the employee, sometimes an underpayment.

The annual reconciliation follows on from the tax declaration the employee signs on joining or at the start of the year: through that declaration the allowance and child bonus are applied month by month, and the reconciliation checks at year end whether that was right. It is not a new tax but a recalculation of what has already been withheld from pay.

How it works in practice

The employee applies within the statutory deadline after the year end and attaches certificates from other employers and evidence for the entitlements claimed. On the employer’s side the payroll record is the source.

Separately there is the annual reconciliation of health insurance, performed by the health insurer - a different thing, concerning contributions rather than tax. It too can produce an overpayment or an underpayment.

We carry the result into payroll: a refund is paid to the employee with their wages and the employer offsets it against the advances it remits to the tax administrator, while an underpayment is deducted from pay. All reconciliations then appear in the annual withholding report the employer files for the whole year.

What to watch out for

Anyone with several kinds of income during the year, or foreign income, generally cannot use the reconciliation and files a return themselves. A missed entitlement to the bonus or an allowance can then only be fixed through a return, not through a late reconciliation.

If an employee conceals income from another employer in the same year, the reconciliation compares the withheld advances with the tax on incomplete income and comes out wrong. The tax administrator later assesses the difference, usually on the employee, so an employer will not perform the reconciliation without certificates from every payer of income for that year.