Many Dutch people will receive their holiday pay again at the end of this month. A nice extra, but how much money do you actually get? And how much tax do you pay on your holiday pay?
“We call it holiday pay popularly, but that is actually a misnomer from a legal point of view,” says Dik van Leeuwerden, responsible for legislation and regulations at HR and salary service provider ADP.
“Holiday pay is actually the money that you continue to receive from your employer if, for example, you go on holiday for three weeks. The money that many Dutch people receive in May or June is officially the holiday allowance. It is included in the Minimum Wage and Minimum Holiday Allowance Act.” This holiday allowance is from after the Second World War and since 1968 it has been established that it must be at least 8 percent of the gross salary.
“Everyone with an employment contract, benefit or a contract as a temporary worker receives holiday pay,” says Marjan Heemskerk, accountant and blogger at The Happy Financial. “However, the latter group often receives their holiday pay monthly. Employees are not obliged to pay it out annually.” The only rule is that the money must be paid out by June at the latest.
Holiday pay accrual may differ
The structure of your holiday pay can differ. “That depends on the composition of your employment conditions,” says Van Leeuwerden. “So always first start by looking at what has been agreed in your contract. For example, your employer may take a reference month, for example May, and take 8 percent of that gross salary and multiply that amount by twelve (months).”
“Other companies save 8 percent of your gross salary every month from 1 June to 1 June. If your income is stable, that’s easy. But if there are fluctuations, it takes a bit more calculations. And then there are also companies that have a calendar year,” says Van Leeuwerden.
Income tax on holiday pay
If you know what your gross holiday allowance is, you can check what is actually deposited into your account. Many people are shocked by the fact that quite a lot of tax is withheld. “That’s because this is a special rate,” says Heemskerk.
Yet we are not there yet. You may see on your pay slip that it says a higher percentage than the highest regular rate of 49.5 percent. What’s up with that? Heemskerk: “That is because a correction is made to the tax credits. These discounts are income-dependent. The more you earn, the fewer discounts you receive. The holiday pay increases your income, so your tax credits decrease.”
Van Leeuwerden: “We call this the settlement percentage. Your general tax credit and the employed person’s tax credit decrease due to your higher income, so it seems as if you pay even more tax on your holiday pay.”
Temporarily out of service
If you leave employment in the meantime, your accrued holiday allowance will of course still be paid. “Just like your outstanding vacation days,” says Heemskerk. “If you then start with a new employer, you will build up holiday pay there again from that moment on.”
Van Leeuwerden notices that the holiday allowance is becoming less popular due to the rise of individual choice budgets. “These are included in many collective labor agreements. You may know them from the pot that you can use to buy a bicycle, for example, or from which you can pay for a study. Some companies choose to deposit the holiday pay in those pots, so that people have more to spend in their personal choice budgets.”