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!
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.
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.
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):
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 🙂
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!