Income tax rates

What it means

Income tax rates set the percentage at which the tax base of individuals and companies is taxed. The Income Tax Act distinguishes them by type of taxpayer, level of income and sometimes by type of income.

For individuals the tax is progressive: a lower rate applies to the tax base up to a threshold derived from the subsistence minimum, and a higher rate to the part above it. A sole trader with low business revenue may apply a reduced rate.

For companies the law distinguishes a reduced rate for small companies with low revenue, linked to micro taxpayer status, a standard rate and a higher rate for companies with very high revenue. Dividends and income subject to withholding tax are taxed separately.

How it works in practice

Rates and thresholds have changed often in recent years, so for every tax return we check them against the version of the law in force for that tax period. For clients with income close to a threshold we calculate how the tax would change if part of the revenue moved into another period.

When comparing a sole trade with a limited company, we look at the total burden: the income tax rate, dividend tax, contributions and administration. At lower incomes a sole trade often comes out better, at higher incomes a limited company, but the result depends on the actual figures.

For tax advances we take into account the current rate and expected developments. If a company moves into a different rate band, we warn the client that advances based on last year’s tax may not reflect reality.

What to watch out for

The reduced rate for companies and sole traders depends on revenue or income, not on profit. A company with high sales and small profit may therefore not qualify for the reduced rate even though its tax is low.

Artificially splitting a business into several entities just to keep each below the threshold for a lower rate may be treated by the tax office as abuse. When structuring companies we therefore always consider the economic substance, not only the rates.