Holiday allowance tax

Tax must always be withheld on holiday pay. Therefore, it cannot be paid tax-free. It is considered as income for your employee, so income tax must be paid on it.

For income up to €73,031, the rate is 36.93%. For income above that amount, the top rate is 49.50%. Holiday pay is a form of income paid in addition to the regular salary. Therefore, it is subject to the highest applicable tax rate for the employee. So, if an employee has a taxable income of €75,000, their holiday pay falls into the high rate of 49.50%.

Holiday pay is considered a 'special remuneration.' Therefore, just like bonus tax, the tax table for special remunerations applies to holiday pay. This means that, in addition to the standard tax rate, a reconciliation percentage also applies. The height of this reconciliation percentage depends on the employee's annual income. You add it on top of the 'standard rate' mentioned above.

*These employees are not entitled to tax credits. Therefore, you do not have to reconcile anything in income tax for them.

Suppose your employee Ellen has been with you for two years and has a gross monthly salary of €3,500. Her gross holiday pay is €3,360. In 2023, Ellen will pay 36.93% tax on this amount. So, you also deduct this as income tax. Additionally, the reconciliation percentage of 6.1% must also be withheld from Ellen's holiday pay. In total, you withhold 36.93% + 6.1% = 43.03% of the holiday pay. This leaves Ellen with a net amount of €1,914.19 from her holiday pay.

For comparison: if the reconciliation percentage did not apply, the net holiday pay would be €2,119.15.

Your employee's salary is taxed monthly without taking into account special remunerations, such as holiday pay or a bonus. This can cause the tax credit to be different from what was originally applied. To correct this, the tax on holiday pay is adjusted, so the employee likely won't have to pay additional tax during the Income Tax return.

You often withhold more income tax on your employee's holiday pay than on their regular salary. However, this amount may be more or less than necessary, depending on the employee's annual income. The Tax Authority calculates the actual withholding during the Income Tax return. Any over- or underpayments will then be corrected.