How does averaging work?

June 15, 2022

How does averaging work?

Does your income from home and work vary a lot? Then there is a good chance that you pay more tax than when your income is evenly distributed. The government has thought of a solution: the averaging scheme. Entrepreneurs often have a fluctuating income. This averaging arrangement could therefore be very useful for you. In this article we explain how averaging works.

Averaging arrangement

The averaging arrangement is an arrangement whereby people with a fluctuating income can sometimes get paid tax back. The averaging arrangement only applies to tax from box 1, income from work and home. It is not intended for everyone to apply for averaging. Therefore, you must first make your own calculation to see if you are entitled to a refund. If your own calculation shows that you can get a tax refund, it is smart to submit a request for averaging. You do not have to send your calculation along with the form. 

Calculating the averaging scheme

The calculation consists of a number of steps. First of all, you have to add up your income from work and home for three consecutive years. This is the three-year period over which you want to calculate the averaging. If your income/loss is negative, you must calculate with an income of 0. You then calculate the average by dividing the result by three. Then you must again calculate per year how much tax you should have paid on this average income. You do this for those three years. The tax rates can change from year to year, so you have to calculate this separately for each year. Eventually you calculate the difference between the total tax you have paid in these three years and the tax you would have paid with an even income (so the average tax). For a difference greater than 545 euros, you can get this difference back. This is a lot of information so we will try to clarify this with an example.

The following example belongs to the table above. We'll first explain the table to you. In the Netherlands, someone with a high income pays relatively more tax than someone with a low income. The table shows that in 2021 you pay 37.10% tax on the first part of your income (up to €68,805) and 49.50% tax on the part of your income above €68,805.

Suppose you had an income of €50,000 in 2019, an income of €100,000 in 2020 and an income of €30,000 in 2021. You paid a total of €71,070 in tax in these three years. You can just see this amount on your income tax return.

On average, your income in these three years was (50,000+100,000+30,000) / 3 = €60,000. Then calculate how much tax you would have paid in 2019, 2020 and 2021 with an income of 60,000. 

For 2019: 20,385 * 36.5% + (34,301 - 20,385) * 38.10% + (60,000 - 34,301) * 38.10% = 22,564 euros in tax

For 2020: 60,000 * 37.35% = 22,641 euros in tax

For 2021: 60,000 * 37.10% = 22,260 euros in tax

With this average income, you would have paid a total of 22,465 + 22,614 + 22,260 = 67,339 euros in these three years. So you would have paid less tax than you actually paid (71,070 euros). This difference is 71,070 - 67,339 = 3731 euros. This is more than 545 euros and therefore you can probably get a tax refund.

The conditions for the averaging scheme

There are also a number of conditions for averaging. These are listed below:

  • You have paid tax in the Netherlands over the entire period (so all three years)
  • You have filed a tax return for the last year of the averaging period and a final assessment has been imposed.
  • An assessment is irrevocable after 6 weeks, you can no longer lodge an objection. You must submit the request for averaging within 36 months after all assessments of that period have become irrevocable. 

Does averaging influence (received) allowances and annual space?

The answer to this question is no. Averaging has no influence on allowances, annual space, etc. No income will be changed due to a request for averaging. In other words, the income on which the allowances and annual allowance are based remains unchanged. Averaging will therefore have no consequences for annual allowances, allowances and other schemes whose amount is a derivative of your income. So, a request for averaging has no adverse consequences.

Averaging is attractive if your income from work and home varies a lot each year. To see if you are entitled to averaging, it is best to make a calculation yourself. Making this calculation can never hurt. You don't want to miss out on any money, of course!