Changes in tax rates and tax credits - 2021 Tax Plan

28 september 2020 | Door:  Matthijs van Dorssen

Last year the Government chose to introduce a two-band system and raised some tax credits. This will be continued. The lowest tax rate will be further reduced and the main tax credits will be higher.

Two-band system: rate in first band to be reduced

Since 2020 there have been just two bands for income tax purposes. This year (2020) the rate of income tax in the first band of box 1 stands at 37.35% and will be reduced slightly in 2021. The rate applicable in the second band will remain at 49.5%.

The aim is to make only a small adjustment to the rate in the first band in 2022.

Overview of changes to tax credits

Everyone is entitled to a general tax credit – a credit against income tax. This credit is dependent on your income: the lower your income, the higher the credit. The general tax credit will be increased in 2021.

Accelerated reduction in mortgage interest relief on own home

Since 2014 the tax advantage available in the form of mortgage interest relief has been gradually reduced, if the interest is deducted at the highest income tax rate in box 1. In 2020 it is still possible to deduct mortgage interest at a rate of 46% In 2021 the maximum rate of the deduction will be 43% and in 2022 40%. A further reduction will be applied in 2023, with the result that mortgage interest will be deductible at a definitive maximum rate of 37.07%. This percentage corresponds to the rate in the first income tax band.