Tax facility for pension and annuity accrual suddenly dropped
Publication date: December 11, 2024
Yesterday, the annual Question and Answer of the Tax Authorities was published that lists the provisional state pension thresholds for the next year. Useful in connection with pension administration by pension providers and employers. This annual Q&A also lists the so-called capping treshold for pension. What turns out? The government has frozen this treshold of €137,800 for the next two years. Because the deductible does increase, there is suddenly a cumulative pension and annuity premium reduction. The effect is larger than it first appears.
Amendment in Tax Plan 2025 is the cause
A footnote in the Question and Answer states that because of an adopted amendment regarding the Tax Plan 2025, the capping treshold will be frozen. This treshold when introduced was €100,000 and has increased over the years due to inflation to the current amount of €137,800. The amendment sets the statutory increase at zero for two years. Because the state pension deductible does increase in 2025 and 2026, the pension base for higher earners decreases.
Effect is bigger than you think
The freezing of the capping treshold appears to be only for two years, but it has an unlimited effect. Starting in 2027, the capping treshold will normally rise again, but will always be lower than it would have been if the amendment had not passed. This decreases the premium for tax purposes for the next two years by a total amount of almost €6,000. A 45-year-old with a salary above €137,800 will be confronted with a decrease in pension premiums by a total amount of approximately €87,000.
Relationship to the gift deduction
Freezing the capping treshold does not seem to be a goal in itself, according to the explanation of the amendment. Indeed, the amendment also regulates that the gift deduction in corporate taxes is maintained and the gift allowance in income taxes is widened from €250,000 to €1.5 million. In this way, the generosity of entrepreneurs and individuals is not punished, but rather enabled, according to the submitters. This is a noble idea on the part of the submitters, but it is extraordinary that limitation of pension savings is regulated in a side room of the Tax Plan 2025.
After all, who actually pays for maintaining the gift deduction?
If spending is doled out in one area, cuts must be made in another. Freezing the capping treshold on pensions means lower employer (pension) costs and more corporate tax revenue for the government. Thus, properly speaking, the government-facilitated giveaway by entrepreneurs and individuals takes place on behalf of employees with a high income. Since these are the so-called happy few, many are likely to shrug their shoulders and move on to business as usual.
