Understanding Danish Income Tax
When moving to Denmark it is difficult to obtain meaningful information in the public domain enabling income tax to be calculated accurately. Advice from friends or colleagues will more than likely yield the answer “It’s about 50%”. There is strong evidence to support a theory that Danes are subject to a tax lobotomy at birth. This has enabled successive governments in inflict the highest levels of personal taxation in world without anyone noticing or indeed caring. Being a foreigner I unfortunately missed out on this procedure which has left me with a frustrating desire to discover how my Danish tax is calculated. After numerous unsuccessful Internet searches for specific information or “God forbid” some kind of Danish tax calculating tool I set my self a quest to personally discover one of the greatest unsolved mysteries in Denmark. How do I calculate my income tax.
With much help from my wonderful beleaguered wife, the end result is a spreadsheet free for anyone who cares to download. It requires a few basic details and magically calculates Danish income tax with no need for expensive tax consultants or other such leaches advertised when you search online.
To download the danish tax calculator click bleow
To date only one Dane has downloaded the spreadsheet strengthening the theory of the tax lobotomy.
I will attempt to write a verbal description to explain how the calculations are executed. Our case study will use Mr. Richard Hoved who lives in Copenhagen. Richard is a just above average earner.
Richard earns 450,000 DKK per year. He has a mortgage and jointly owns the house he lives in with his blonde wife Jamila Hoved who earns 300,000 DKK per year. The interest payments are 40,000 DKK per year. Mr Hoved also travels 30 Km to work each day.
The first tax of many that are painfully extracted is AM bidrag , the equivalent of UK national insurance. It is deducted from the complete income before any tax calculations are started. The rate is presently 8%
450,000 (Mr. Hoveds yearly Salary) x 8% = 36,000
36,000 will therefore be Mr. Hoved’s Am Bidrag payment for the year.
We now deduct this amount from Mr Hoved Salary
450,000 – 36,000 = 414,000
414,000 is used in the remaining calculations and referred to as Mr Hoveds “taxable income”.
There are a number of income taxes set locally.
Denmark is divided into a number of Kommunes, the equivalent of UK county councils.
Every Kommune is responsible for setting 3 tax rates.
Kommune tax; this varies from place to place by as much as 4 percent.
Health tax; this is presently 8 percent in all kommunes.
Church tax; this varies from 0.5 percent to 1.5 percent depending on the kommune and is optional.
Richard Hoved lives in Copenhagen.
Kommune taxes for Copenhagen in 2009 are shown below. Tax rates for all kommunes are displayed in the spreadsheet.
Kommune tax 23.8%
Health tax 8%
Chruch tax 0.8%
Total Kommune Tax = 32.6%
Various discounts can be applied to these locally set taxes. The discounts are in the form deductable amounts on the taxable income (for Mr. Hoved 414,000) they are only applied on these set of taxes. Interest payments can be deducted from your taxable income. There is also a travel to work credit, based on the number of Km’s, if the return journey is greater than 24 Km. A working tax credit is also added to slightly ease the pain.
It is very important to note that these credits are only applied on the Kommune taxes.
The present government decided to set a Tax ceiling of 59% + Am Bidrag 8%. This means that people living in higher taxing Kommunes can look forward to a slight reduction on top tax to bring into line with 59 % rule.
Mr Hoved’s taxable income = 414,000
Mr Hoveds interest payments = 40,000
This reduces the taxable income for Kommune taxes
414,000 – 40,000 = 374,000
Mr. Hoved travels 30 Km to work, a 60 Km round trip a day.
A credit can be calculated.
1.83 DKK per kilometer above 24 Km and 0.92 DKK for every Km above 100 Km.
John can therefore claim
60 km - 24 km = 36 Km
36 x 1.83 = 65.88 DKK per working day,
The normal working days per year is estimated to 218 days after deducting national holidays, weekends and vacation.
65.88 x 218 = 14,361.84
This amount can be deducted from the taxable income for Kommune taxes.
414,000 – (40,000 interest + 14,361 travel credit )
Taxable income for kommune so far = 359,639
There is a working tax credit allowance.
This amounts to 4 percent of income with a maximum credit in 2009 of 13,600
4 percent of Mr. Hoved’s income is 18,000 so the maximum amount applies of 13,600 DKK.
Mr. Hoved’s Kommune taxes are calculated as follows
Taxable income (Income minus 8%) = 414,000
Tax credits to be deducted from the taxable income
Interest = 40,000
Travel = 14,361.84
Working Credit = 13,600
Total Credits = 67,961
Taxable income for kommune = 414,000 – 67,961 = 346,038
Kommune tax for Mr. Hoved living in Copenhagen = 346,038 x 32.6% = 112,808.38 DKK
Richard is then pillaged for the nationally set taxes
Bottom tax in 2009 = 5.04 %
Middle tax in 2009 = 6%
Top tax 2009 = 15 %
Bottom tax 414,000 x 5.04% = 20,865.6
To slightly ease the pain, middle tax and top tax are designed only to affect the wealthy the Danish state presently defines you as wealthy if you earn above 347,200 DKK per year.
Middle tax for Richard Hoved is calculated as follows
Taxable income 414,000 – Middle tax threshold 347,200 = 66,800
Taxable income for Middle tax = 66,800 DKK
Middle tax = 66,800 x 6% = 4,008 DKK
However Richard Hoved is married and his wife earns 300,000 per year. Very generously the state allows Married couples to transfer any remaining unused middle tax threshold to the other partner.
Mrs. Hoved taxable income = 300,000 – 8% = 276,000 DKK
Transferable middle tax threshold = 347,200 (middle tax threshold) – 276,000 (276,000 is Mrs. Hoved Taxable income) = 71,200
This amount is transferred.
Mrs Hoved’s unused middle tax threshold can be added to Mr Hoved’s threshold of 347,200
347,200 + 71,200 = 418,400.
This means Mr. Hoved’s taxable income has to be above 418,400 before he needs to pay middle tax. As Mr. Hoved’s taxable income is only 414,000 and his new middle tax threshold is now 418,400 Mr Hoved does not have to pay middle tax. However the killer blow has yet to be delivered. This is called Top tax
Mr Hoved’s Top tax:
Taxable income = 414,000 – 347,200 (top tax threshold) = 66,800. It is worth mentioning that no transfer of top tax is allowed for married couples.
66,800 x 15% = 10,020 DKK
To summarize let’s add up Mr. Hoved’s tax bill so far
AM Bidrag = 36,000
Kommune Tax = 112,808
Bottom Tax = 20,865
Middle Tax = 0 (If he was single the charge would be 4,005 DKK)
Top Tax = 10,020
TOTAL DAMAGE = 180,485
Fearing this is too little the Danish state then screws Mr. Hoved for the pleasure of living in his own home.
The state sets a value for everyone’s home which is then taxed. The taxable value can be discovered at the following webpage:
Property value tax has nothing to do with income. Only the value of the property.
Luckily the state in their infinite wisdom decided to freeze values on house prices from 2001 due to the rise in property values.
Mr. Hoved owns his property with his wife. The taxable value is deemed to be 1,500,000
Property value tax is charged at 1% of the property’s value below 3 million kroner and 3 percent on value above 3 million. Luckily the Hoved family will only be screwed for 1 percent.
1,500,000 x 1% = 15,000 Kroner
This is equally shared with the owners of the property. As Mr. Hoved lives with Mrs. Hoved his tax bill for the privilege of living in his own home is
15,000/2 = 7,500 DKK
The tax free allowance and tax percent are now thrown into the equation. This gives the danish state a method of discounting tax for low earners and simple model of tax collection for employers.
The tax percent figure has the bonus effect for politicians of hiding the true tax level on the “last earned kroner”. This will be shown in a later example.
The tax free allowance for 2009 is a very generous 42,900 DKK per year
First we will examine how the tax free allowance is applied, do not confuse this with UK tax free allowance. The Danish method is totally different.
Firstly a tax credits are calculated from the generous tax free allowance figure.
Total Kommune tax percent 32.6% x 42,900 Tax free allowance = 13,985.4
Tax free allowance credits are broken down separately as Kommune tax, health contribution and church tax these are displayed on the tax card. A tax card is a printed tax statement, issued to everyone with a registered income.
Bottom tax 5.04% x 42,900 (Tax Free Allowance) = 2,162.16
13,985.4 (from Kommune tax) + 2,162.16 (from bottom tax) = 16,147.56
This can be deducted from Richard’s tax bill
Richard Hoved’s tax bill for 2009 will be as follows
AM Birdrag 450,000 x 8% = 36,000 DKK
Kommune taxes 346,038 x 32.6% = 112,808 DKK
Bottom tax 440,000 x 5.04% 20,865 DKK
Middle tax 6% of joint threshold 0 DKK
Top tax 15% 414,000-347,200 10,020 DKK
Property tax 1% x 1,500,000 /2 owners 7,500 DKK
Tax Credit 16,233 DKK
TOTAL DAMAGE 135,046 + 36,000
The figures are deliberately kept separate so they don’t look as high.
The Danish state now needs a method of collecting the above-mentioned figures.
This is done by calculating a tax percent and an individual tax free allowance for every tax payer using the following mathematical process.
First the tax percent which cleverly ignores AM Bidrag.
Kommune tax 23.8% For Copenhagen
Health contribution 8%
Church tax 0.8% For Copenhagen
Bottom tax 5.04%
Percentage of total income paid in middle tax = 0%
Percentage of total income paid in top tax:
= 10,085 (Calculated Top Tax) / 414,000 (Taxable Income) x 100
= 2.43 %
We now add these taxes together = 40.07%. For good measure the state rounds this up
Mr. Hoved’s tax percent is calculated to 41%
Now we need to calculate Mr. Hoved’s tax free allowance.
The following formula is used:
(Taxable Income) – ((Tax Owned x 100) / Tax Percent)
This amount is then divided by 12 to get the monthly tax free allowance.
(414000 – 135046 x 100 / 41 ) / 12 = 7051
The 2 figures can now be used to collect the correct amount of tax per month
41% and 7051
Mr. Hoved earns 450,000 per year.
37,500 per month
His employer armed with the 2 figures 7,051 and 41% can do the following simple calculation
37,500 Mr. Hoved’s monthly salry - (8%AM Birdrag x 37,500) = 3,000
Mr. Hoved’s monthly taxable income = 34,500
34,500 – 7,051 tax free allowance = 27,449
The tax 41% is then calculated on 27,449
41% tax percent of 27,449 (which is Mr. Hoved’s salary - AM Bidrag and tax free allowance) = 11,254
Mr Hoved can then look forward to receiving the following
37,500 - 3,000 AM Bidrag – 11,254 Tax
= 22,982 DKK
If Mr Hoved decides to spend any of this money he can look forward to giving a further 25% to the State in the form of Sales Tax. 25 percent is the highest rate allowed in European Union and applied to everything including food and heating.
Further local taxes will be charged for local utilities, this is similar to UK council tax.
It is quite complex to calculate Danish tax and there are a number of scenario’s that often result in huge amounts of underpaid taxes.
The tax percent masks the damage inflicted on the last earned kroner.
Therefore if Mr. Hoved receives a pay rise halfway through the year and does not adjust his tax percent. It can leave a large deficit payable in the following year, with interest, if not paid immediately. This is because every extra Kroner earned is taxable at the full rate. Not the calculated “tax percent”. Consider the following example.
Mr. Hoved works some overtime. Over a period of 2 months he earns an extra 12,000 DKK.
This money should be taxed in the following way.
12,000 – (12,000 x 8%) = 11,040
32.6% + 5.04% + 0% Middle Tax (because of joint threshold) + 15% = 52.64% of 11,040 = 5,811
However the extra 11,040 (over time – AM Bidrag) takes Richard over his joint middle tax threshold of 418,400 so he will now be liable for middle tax on the amount of 6,640
414,000 (present taxable income) + 11,040 (overtime – AM Bidrag) = 425,040
425,040 (new taxable income) – 418,400 (middle tax threshold) = 6,640
6% of 6,640 = 398.4
11040 – 5811 – 398.4 = 4830.6
Mr Hoved should only get to take home 4,830.6 out of 12,000 paying almost 60% in tax on this amount. If tax is only charged at 41 % + 8% shown on the tax card it is easy to see a large deficit can occur. It is therefore recommended that people over estimate there income to facilitate any changes throughout the year.
Mr. Hoved luckily realized this predicament and was given payment in kind. A flat screen TV worth 10,000 Kroner
Saving his employer 2,000 Kroner and himself over 5,000 Kroner. Not to forget that his employer can also deduct 25 % sales tax from the puchase. This is an example of the black economy rampant in Denmark.
Another pitfall of the Danish System is Holiday Pay. This prehistoric method of stewardship needlessly keeps a complete government sponsored department in business and causes pain for employers and employees across the land.
The state does not consider its hard working citizens capable of managing their own finances so invented the system to look after everyone unable to think for themselves.
Here is how it works.
Every Dane is entitled to 25 days holiday per year. Rather than the employer and employee decide when the time can be taken a nightmare system governs how it works.
Every employee earns 2.08 days per month. The count starts in January, but can only be used the following year. This is written into Danish law. The holiday earned can be used from May to May the following year
Mr. Hoved joins company X in December 2007. In July 2008 he wants to take 5 days holiday. Even though he has worked for the company 7 months and has amassed 14.5 days of holiday he is not allowed to take the time off with pay.
Mr. Hoved can only take 2.08 days of paid holiday in 2008 earned from December 2007 after May 2008. He has to wait until the following May 2009 before he can take the holiday he earned throughout 2008.
By the time Mr. Hoved is allowed to take any paid vacation he has amassed a staggering 33.28 days.
The law states that holiday is earned January to January and used May to May. There is no-one alive in Denmark today that can explain why this is the case.
One of the many unfair inconveniences of this system is when you change jobs.
Mr. Hoved Started working for company X in December 2007. He worked there for 1 year and 1 month leaving on the 31st December 2008. Company X is responsible for Mr. Hoved’s holiday pay.
They are legally bound to transfer 12.5% of 450,000 (Mr Hoved Salary) to a state run holding company.
The holding company then write to Mr. Hoved and tell him that from May 2009 he can claim back his own money they are looking after for him.
So Mr Hoved has 56,250 – tax. His own money sitting in someone else’s bank account. He is not allowed this money as the state does not trust him.
What is totally incomprehensible is the fact that the 56,250 is added to Mr. Hoved’s 2007 income even though he can’t get his hands on it until May 2008. The holding company deducts tax but only on the amount in Mr Hoved’s tax card presently at 41%.
Mr Hoved did not know he was going to leave company X so did not have time to change his income by 56,250 on his tax card.
When the tax office calculate they see that Mr. Hoved has been almost dishonest.
He stated he was only to earn 450,000 and as it turns out he earned 506,250 but he was only taxed at 41%.
The total difference after various calculations, not shown here, amounts to 12,456 Kroner. The Danish state will demand payment for this around March 2008.
Mr. Hoved’s holiday pay after tax comes to 30,532. He then has to pay an additional 12,456 because the holiday pay was not taken into account on his estimated income. Mr. Hoved is now left with only 19,687 kroner to last him for 25 days holiday.
The very system designed to protect peoples income ends up destroying it.
Luckily for Mr. Hoved in 2010 he would more than likely receive a tax credit. The holiday taken funded by the holiday pay would reduce his income to below his estimate. However it takes about 2 years for holiday payments to balance through the system if you decide to change jobs. The best solution is to either change countries or change jobs early in the year giving you time to change your tax details to absorb the holiday pay into your income.
One of the biggest problems concerning the Danish system can be seen by reading this document. Its not the taxes are high resulting in a black economy or there are taxes unrelated to income. It’s the simple fact that its too complicated. It should not take an excel spreadsheet and 3000 words to explain how a Mr. Average, tax is calculated bearing in mind we haven’t even mentioned capital gains taxes or different types of pensions available. It should be clear and simple to understand and easy to administer. Whatever the flavour of one’s political persuasion the unrefutable fact is Danish tax should be modernised and made simpler.
I hope this article has been helpful to any readers interested in how tax is calculated in Denmark.For any further information or if you have any basic questions mail to Tax@daytel.net Please have in mind I am not an accountant I am a curious network engineer without a tax lobotomy.