Get a pay increase for part-time work

How to get a pay increase for part-time work? It’s actually not that hard and it goes automatically in the Netherlands. The height of the pay increase does however depend on your income. How does this all work? Taxes!

Those bloody Taxes!

Yeah, nobody likes taxes, I know. But they are inevitable and essential for a society to function. I doubt you would voluntary provide money to your local government to fix the sewer system. Or walk by the police department to pay for new equipment and coffee & donuts. But when you need them, you are happy that all this stuff works. That being said, nobody likes to pay more taxes then they need to, right? How to do this? Go and work part-time!

Get a pay increase for part-time work – Taxes!

How does income tax work in the Netherlands?

I wrote something about Box 1 taxes a long time ago. For this year (2020) pretty much only the tax rates and brackets have changed. The system itself in still very much the same. So, where are we today? Well, the income tax in Box 1 now only has two brackets. Up to €68.508 gross income you pay 37.35%, on anything over is taxed at 49,5%. This is assuming you have not reached the formal retirement age yet.

But, you get tax credits too to lower the income tax you need to pay. To keep this simple I’m only going to review the “algemene heffingskorting” (“general credits”) and the “Arbeidskorting” (“labour credits”). Both credits are depended on how much you earn (gross wage).

To illustrate the effects of these three income taxes/credits, I’ve made the following graph below.

Get a pay increase for part-time work – Box 1 taxes

The graph above is for a single person (without a financial partner), who does not own a house or has any other tax deductions (e.g. a healthcare expenses, etc.).

If you look at graph above, you notice that the combined tax credits are highest at around €18.000-21.000 mark. Also note that if your income tax is smaller than tax credits (roughly below €7.900 gross income), you don’t just get free money from the government. That sucks, I know! Unfair 😉

What is the effective tax rate for the various gross income amounts? Well, see below, it’s a very progressive system. Meaning, the more you earn, the more you pay. But if you earn a little, you also pay a little.

Get a pay increase for part-time work – Effective Box 1 tax rates

How you can get a pay increase for part-time work.

Besides working you ass off at work to try and make promotion, you can also take a “demotion” and go work part-time. It might actually make you more money. Well, per hour at least. Here is an overview of a couple scenarios (mean income is estimated at €36.500 in 2020):

Get a pay increase for part-time work – Income Scenario’s

Why is the table above so interesting? If you are well on you way to become financially independent and want to take it easier, it might be a smart idea to start to work part-time. Scratch that, it’s actually almost always a good idea to work part-time (when financially feasible). Simply because it gives you more freedom and less stress on your way to FIRE (yes, it might take you a bit longer to get there, but the journey matters too).

However, financially it can be a very good thing to do if you earn a decent amount of money (or if you are an independent contractor/ZZP-er). Have a look at the last columns with gross & net hourly rates! Those are some seriously big gaps in hourly pay based on your total yearly income as a result of part-time work.

For example, if you want from working a full time job and earning €60.000 per year, to working part time 3 days per week. Your net hourly wage would increase by 16.16%. That is one heck of a promotion 🙂

Barista FIRE

No, not everyone can become FIRE in the Netherlands. The tax system does make that very difficult and/or time consuming. But, if you use the system to your advantage, you can get away with a nice combination of part-time RE with a part-time job: Barista FIRE.

If you can have sufficient wealth to cover say up to 50% of your income. You only need to get the remaining income from work. As the Dutch government stimulates work by keeping effective tax rates low, you can benefit greatly if you can get away with a smaller income to supplement your income from investments. It really is a great way to get more time for yourself sooner without the need to be fully FI. Oh wait, that’s exactly what we are doing currently (with Mrs CF working only 3 days per week) 😉

Part-time work to the rescue!

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19 Comments

  1. Awesome post. I am still a student in the Netherlands working partime so stinot nearly FIRE yet but good to know these tax brackets applied.

    Perhaps you could do a post on how taxation exactly works in the Netherlands? For instance, how much of your income from markets investments will be taxed. Just an idea.

    1. Thanks, yeah, it definitely a good thing to think about, part-time work. But you do need a good employer that is willing to help out and accommodate your requests. Lot’s are still stuck in the middle ages…..

  2. The algemene heffingskorting can also be used to offset box 3 taxes.

    Lets assume the case where an individual has more than 220k euros in box 3 savings, and no box 1 income. In this case this individual would not have to pay any tax at all.

    Lets now assume the case where this individual is working. From a box 1 income above 8k euro, the benefit of the maximum algemene heffingskorting (2711 euro) to offset box 3 taxes is entirely gone.

    In your table you can take this into account by substracting 2711 euros from the net income.

    The result is a non linear function for incomes upto approximately 1,5x the “mean” income and leads to another conclusion.

    To fully optimize the tax load in the Netherlands you have to become a freelancer.

    1. Good point and you also highlight that fact why I kept this one simple and only focused on Box 1 without wealth (or many other deductions and such). There are simply way too many options and variables to make calculations for every scenario. That being said, If I take my excel sheet and remove the “algemene heffingskorting” (as if it would be fully used in Box 3), the lowest effective tax rate comes in at €21.000 at around 20.8% (due to the arbeidskorting). But that does not really change the conclusion much, work less means paying less taxes (down to €21.000 in this case, below that you would get negatively affected based on this scenario of removal of the algemene heffingskorting in Box 1). So you are still able to get a higher net income by working less, right?

      1. If somebody only has box 3 capital and no box 1 income, they get the full ” algemene heffingskorting”. Their income is box 3 gains – box 3 taxes – algemene heffingskorting in taxes.

        If this same person starts working and earns 36000 per year, based on their salary they only get 1844 in “algemene heffingskorting”. This means their income is box 1 income + box 3 gains – box 3 taxes – reduced algemene heffingskorting – arbeidskorting – box 1 taxes.

        So you do not only have to delete this column, you have to subtract the full “algemene heffingskorting” from the values.

        So for somebody earning 36000 in box 1, you should not subtract 1844 in algemene heffingskorting, but put a penalty of 857 there. This is the amount of tax credit that they lost by chosing to work instead of living of their capital.

      2. Fair point. That being said I’m personally not too worried about this penalty effect, it’s unfortunate if that happens but for most people it’s really hard to perfectly earn or have a certain amount of wealth to benefit optimally from the tax laws. Plus, it changes by year too. It’s a mission impossible! That being said, most people that will FI will easily use of the full “algemene heffingskorting” in their Box 3. If you to and work, you will just lose out on some of those tax breaks (depending on your income of course).

  3. Great post!

    (Minor grammar remark: it’s ‘who’, not ‘whom’, in ‘whom does not own a house or has any other tax deductions’, since it’s the object of the sentence. 🙂 )

  4. Currently 4-days per week myself. No plans to go back prior to pulling the plug altogether, except *maybe* to qualify for a higher mortgage level, if that’s needed.

    3-day weekends are great and have made it possible to incrementally step towards RE and make the rest of the journey more tolerable.

    And as you show here, the hours “not worked” act as a kind of “pay rise” on the hours still worked thanks to the effect of progressive tax rates.

    FWIW I think four day work weeks should become the norm for all… but for now I’m happy at least I can get it!

    I’m also at a later stage in the journey, so investment income and capital is at a level where it generates the lion share of wealth gains such that the impact on FI trajectory due to slightly lower earned savings is minor.

    1. Hahaha, we were thinking the same. Getting two full time job temporarily just to get a higher mortgage 🙂
      Well done on the 4 day work week, guess you are right that the Netherlands is trending more towards 4 day weeks at the norm. Probably a good thing anyways!
      Good point on the impart of part time work towards the end of your FIRE journey, it does start to make less of an impact.

  5. You can even optimize more if you have a mortgage. If you add the money you can deduct to the optimal income of about 20k, you also don’t pay taxes for that. So I’d you have a mortgage interest deduction of 3000 euros, go work with an income target of 23k.

    1. Oh yeah, mortgage interest, “inkomensafhankelijke combinatiekorting”, medical expenses, etc. etc. You can optimise the heck out of it! It’s more that you are aware that these optimisation exist and work with them, than that you find the actual optimum point, right?!

      1. Going for an exact optimum does not make sense. I would also not refuse a raise, even if I pay a lot of taxes on it 🙂
        The only time that I think about an exact optimum is when I distribute expenses with my fiscal partner when doing my taxes. I go for the optimum by the single euro!

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