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In 2020 Belgium is still the country with the highest average income tax and tax wedge in the world (OECD, 2020a). I’m willing to bet Americans’ blood would boil seeing my payslip at the end of the month. 52.2% of what my employer pays for me ends up in the hands of the government. For comparison, the tax wedge for a single with no kids in the US is 29.8% (OECD, 2020b). So where do these taxes come from?
Belgium taxes income in three major ways:
- Progressive income tax
- Social Security Contributions Employee
- Social Security Contributions Employer
All of these combined plus any payroll taxes, minus any benefits received by the employee are what OECD describes as the salary wedge.
The salary or gross salary is what you negotiate as a worker in Belgium, on this salary you get taxed. In addition to the agreed salary for the regular working hours worked, other salary elements can also appear here. Things like overtime wages, commissions, wages for public holidays, holidays, small-time off, etc. Basically, a lot.
In the above image, you can see (in Dutch) that the gross salary including other cash will be added up to get the basis for my Social Security Contributions.
Social Security Contributions Employee (RSZ)
The personal social security contributions are withheld from the total gross wages and flow to the National Social Security Office. These deductions are used to pay pensions, unemployment benefits, sickness benefits, child benefits, and so on. For white-collar workers, the social security contribution is 13.07 percent of the gross wages. For workers, gross pay is first multiplied by 1.08 and the contribution of 13.07 percent is calculated on it.
If an employee earns the guaranteed average minimum monthly income (1,501.82 euros per month for a full-time employed employee), the social security contributions that are deducted from his wages are reduced by 184 euros for a white-collar worker or 198.72 euros for a worker.
If a white-collar worker earns more of the guaranteed average minimum monthly income but less than EUR 2,385.41 per month, the reduction in his social security contributions are even more complex.
In the snippet, you can see that my gross salary gets taxed first and then the BIK of my salary car gets added. On this amount, my employer pays the withholding tax on earned income. You can also see that a fixed amount gets subtracted. This is a lump sum that is exempt from taxes.
Withholding tax: an advance on progressive income taxes
The gross salary minus the social security contribution is what will get taxed as personal income. To know this total taxable wage, some extra details can be added based on your salary package:
- Benefit in kind of a company car
- Double holiday pay or additional holiday pay or holiday pay on termination of employment
- Exceptional premiums or gifts (such as birth or marriage bonuses)
- Execution fees (a severance pay for trade representatives)
Withholding tax on earned income
The withholding tax is calculated on the basis of the total taxable wage. Here, not only the amount of salary plays a role, but also the family situation of the employee, the number of dependents, etc. 2 employees with the same wages will therefore not necessarily pay the same withholding tax.
I’m a prime example of this exception. Up until the 2nd of May, I was single was didn’t get any benefit. Now that I’m married and because my wife doesn’t have an income, my employer doesn’t withhold as much from my taxable salary. Before I got roughly 2500 EUR net per month, end of June, I received 2833 EUR or an increase of 333 EUR net.
However, this withholding tax is only an advance on the total tax that I will ultimately owe. The final bill is drawn up on the basis of the tax return of the following year. If this shows that I paid too much withholding tax, I will get refunded and vice versa. It all depends on your HR department.
With the exception of ten or so countries, most have taxes on the money you earn on your income. So does Belgium and this is where a large chunk of my gross salary goes. Though interesting enough, up till here, Belgium doesn’t tax the most, that honor goes to Denmark.
For Belgium in the below table you can see the figures for 2020:
|Taxable income (EUR)||Rate (%)||Tax on bracket (EUR)||Cumulative tax (EUR)|
However, the Belgian government is generous. Taxpayers are entitled to a tax-free allowance. This tax-free sum is dependant on how many kids are dependant on you but the base amount is 8.990 EUR for 2020.
What is left: my net pay
Finally, we come to the net salary. This is the amount that remains after the social security and the withholding tax have been deducted from the gross salary. After the gross/net calculation, some additional corrections can be made, both in a positive and negative sense.
Additional benefits that are not taxed are: costs reimbursed by the employer upon presentation of a proof of payment, social subscriptions for public transport (up to EUR 380 per year), and mileage allowances.
Additional deductions that are still deducted from the net wages are the special contribution for social security, the employee contribution for group insurance, the benefit in kind of a company car, the employee’s own contribution for meal vouchers (at least 1.09 euros per issued check).
The final result of the salary calculation is the net amount to be paid. That amount is transferred to the employee’s bank account.
For the employer, however, there is more to come.
Social Security Contributions Employer (Patronal burdens)
The employer’s employer’s contributions on top of the gross wages that the employer pays are also included on the payslip but this is purely informational.
In the profit sector, as an employer, you paid a basic percentage of approximately 25% of the gross wages. In addition to this employer’s contribution, blue-collar workers’ employers pay 15.84% for the annual holiday scheme (at 108% of the gross salary).
In addition to the basic contribution, there are a number of special contributions. These contributions are “special” because they are not always directly intended for the branches of social security or because they are only due in certain circumstances.
These are, for example, the employer contribution for meal vouchers (maximum 5.91 euros per meal voucher), the employer contribution for group insurance, and the CO2 tax on company cars. Based on these numbers the employer has to pay extra contributions.
But since they are specifically made to help lower the tax burden on employers, the taxes are usually low or non-existent.
The downside to high taxes
First and foremost, I lose roughly 40% of my gross income. Compared to 12% (married joint tax application) if I were to work in the US. In absolute numbers (roughly speaking as it really depends in your situation) that means of 4535.40 EUR I’d have 3991 EUR left instead of 2833 EUR. That’s a difference of 1,158 EUR or 34%!
Since I invest a large chunk of my income (~15K per year), I could save even more if I deposited this 34% extra into my investment portfolio.
Compound that by 6% (to be conservative) over 15 years (when I plan to FIRE) and I would have earned 63% more!
For argument’s sake, I didn’t consider the difference in cost of living and the other tax-free benefits I get. The above just shows that building wealth over the long-run is harder in a high tax situation, so a clear downside for the Belgian tax system.
Another disadvantage is the reduced flexibility to do what I want. While strong social security is positive, it does come with certain requirements. One is being available in the job market if I want to keep building up contributions for my pension. Available also means accepting job offers, even though I have enough personal capital. I also have to keep contributing to social security. If not as an employee, it is as an independent or government worker.
What is the benefit of such high taxes?
Because of such high taxes, Belgium collects a lot of tax revenue. The biggest benefit is that a doctor visit only costs about 5 EUR since the majority of the cost is refunded. Going to a hospital isn’t dependant on which insurer I’m with as all hospitals offer a certain standard of health care for a reasonable price and are available for everyone, whether you have a medical history or not, or whether or not you have income. Public transport such as busses and trains are (relatively) cheap and get me across the country in comfort.
In Belgium, a lot of money also goes into education. Roughly 12 of every 100 euro goes into our schools. But the biggest use of taxes (about 1/5th) goes to pensions. While my pension is based on the income of future generations and is thus unknown, it’s unlikely I won’t receive any pension. But what I will receive is determined by how much I work. Here is where it gets tricky as I don’t plan to work till +65. The entire point of this fight to FIRE is to prevent having to do that!
However, I will still receive something. As a result, I actually don’t have to save exactly 25 times my annual spending; thanks to taxes.