Do you earn a lot in one year and somewhat less in another? Up to and including the tax year of 2024, there’s a Dutch regulation specifically designed for this scenario. This rule is called the middelingsregeling (income averaging scheme), and it can sometimes offer substantial financial benefits. But how does this averaging work precisely, and how can you take advantage of it? If your income fluctuates, the income averaging scheme (middelingsregeling) can offer you benefits. The last period you can average includes the years 2022, 2023, and 2024. After that, it won’t be possible.
What is the middelingsregeling?
Middeling is a tax regulation specifically designed for people whose income can fluctuate from year to year. The tax system in the Netherlands is progressive; the more you earn, the higher the tax rate you need to pay. In years when you unexpectedly earn more – perhaps due to a bonus, severance pay, or a windfall – you can suddenly move into a higher tax bracket.
So, if your yearly income varies and your income falls into different tax brackets, it’s worth looking into middeling.
What does middeling yield?
Are you curious about the potential benefits of the middelingsregeling? Below is a table for tax refunds of someone who hasn’t yet reached the AOW-age (Dutch state pension age), with various income scenarios for 2020, 2021, and 2022 (income in box 1). Note, these are just examples for the specified years. Sometimes, middeling can yield more when you also include the years 2017, 2018, and 2019.
| 2020 | 2021 | 2022 | Refund |
|---|---|---|---|
| €20,000 | €25,000 | €60,000 | €0 |
| €0 | €0 | €40,000 | €0 |
| €30,000 | €35,000 | €75,000 | €102 |
| €0 | €0 | €80,000 | €690 |
| €10,000 | €15,000 | €100,000 | €3,163 |
| €45,000 | €50,000 | €100,000 | €3,197 |
| €200,000 | €40,000 | €40,000 | €6,645 |
As you can see, the amounts you can get through middeling can sometimes be substantial. Yet, there are situations where, despite fluctuating income, you get nothing back. The reason is simple: when fluctuating income entirely falls within one tax bracket, averaging doesn’t lead to a refund. Only when fluctuating income means you fall into different tax brackets in different years will there be a refund.
The middelingsregeling only pertains to income from work (box 1). Any taxes on savings, stocks or a foreign property (box 3) can’t be averaged.
Who Benefits from the Averaging Scheme?
Averaging can be beneficial in various situations. Consider the time when you started or stopped working. Also, if you took unpaid leave, worked less or more, or received a severance payment, it might be worthwhile to average your income over three years.
Freelancers and entrepreneurs, in particular, are familiar with the challenge of fluctuating incomes. One year might be financially challenging, while the next year brings a flurry of assignments. So, for entrepreneurs, averaging can offer benefits.
When someone is laid off, they now directly receive the severance payment, after withholding income tax, into their account. If you typically fall into a lower tax bracket, this sudden significant amount might push you into a higher bracket. As a result, a considerable portion of your compensation can be taxed at the higher rate. By applying this scheme, you can claim back a portion of the paid tax.
In essence, averaging allows you to somewhat equalize the highs and lows in your income concerning taxes. It ensures that, sometimes, over a three-year period, you pay a more consistent tax rate.
How Do I Submit an Averaging Request (Middelingsverzoek)?
The averaging request always spans a period of three consecutive years, known as the averaging period (middelingstijdvak). For instance, the years 2020, 2021, and 2022 combined. Once you’ve decided which three years you want to average, the next step is the application. You can submit an averaging request up to three years and six weeks after receiving the final tax assessment for the respective averaging period. Did you get the final assessment for 2022 on 5th September 2023? Then you have until 17th October 2026 to make an averaging request for that period.
Can you apply for averaging multiple times? Yes, you can! You can submit multiple averaging requests. However, the years from different averaging periods must not overlap. So, choose wisely and ensure you get the most benefit from this scheme.
Is Averaging Still Possible?
It’s important to stay informed about recent changes. Unfortunately, the averaging scheme will be phased out. The last period you can apply averaging to are the years 2022, 2023, and 2024. This has specific implications for how and when you can still benefit from this scheme.
If you choose 2022 as the final year of your averaging period, combining the years 2020, 2021, and 2022, then you exclude the possibility of later applying averaging for the years 2023 and 2024, potentially missing out on benefits.
What if you wish to retain the option to average over 2023 and 2024? It’s certainly possible! But it can only be combined with the year 2022. This means you’ll need to strategically consider which years are most advantageous for your personal financial situation.
Therefore, making the right choice is essential. We recommend thoroughly considering your options.
Get the Calculation and Application for Your Income Averaging Handled
Would you like to know if averaging benefits you? For a fixed rate of €125 including VAT, we at Taksgemak handle the entire process: calculating the averaging, consulting to select the appropriate averaging period, and sending the official request (including the calculation) to the Tax Authorities (Belastingdienst).
By delegating this task, you can be sure that you select the right averaging period and that your application is submitted correctly. If you’d like to take advantage of this service, please email your last six Aanslagen (tax assessments) to us. You can easily download these by logging into Mijn Belastingdienst.
About the author: Farshad Bashir combines his passion for entrepreneurship with tax advice at Taksgemak to assist businesses and individuals with the complex world of tax regulations. He simplifies the complicated and ensures his clients stay on track. Before diving into the consulting world, he was a member of the Dutch Parliament. This combination of political experience and tax knowledge makes him an excellent partner for anyone.
