Must - must not: Payment of holiday pay
A new law gives employees the right to receive frozen holiday pay early. Does it pay off for you from a tax perspective? We look at that in this article.
The transition to the new Holiday Act means that employees' accrued holiday pay for the period 1 September 2019 to 31 August 2020 will be frozen in the Employees' Fund for Accrued Holiday Pay (the Fund) until they reach retirement age or otherwise permanently leave the labor market.
The adoption of the bill means that you as an employee can receive the holiday pay you have earned in the period September 1, 2019 to March 31, 2020. This corresponds to three weeks' holiday pay.
No top tax for 5 out of 6
You must apply to receive the holiday pay and it will be taxed as personal income before labor market contributions. If you are a top taxpayer, it will therefore trigger a tax of up to 56%.
The ministry estimates that five out of six employees have an income where the early payment of holiday pay will not trigger top tax.
It is also expected that a large proportion of taxpayers who are top taxpayers when they are working will also be top taxpayers when they retire.
Do you need the money now?
Before you apply for an early withdrawal, it's a good idea to consider whether you need the money now, or whether you want it to stay in the Fund to earn interest and add to your retirement.
If you don't normally pay top tax, but can see that the payment of the holiday pay will trigger top tax and you don't expect to pay top tax in the year you leave the labor market, you should consider leaving the frozen holiday pay in place.
The tax depends on the timing
You must pay top tax on personal income plus positive capital income that exceeds DKK 531,000 after deduction of labor market contributions. It depends on the rules at the time of payment whether the payment then triggers top tax, and it may depend on when in the year you choose to withdraw from the labor market.
You can't apply for partial payment, so the choice of early payment of holiday pay is an either-or. The payment does not affect any social security benefits.
More information
If you want to know more about taxation of frozen holiday pay, please contact inforevision'stax department.
