Section 4: Wage earners

4.1. Wage earners

4.2. What is tax paid on?

4.3. What can be deducted in tax?

4.4. When tax has to be paid

4.1. Wage earners

There are approximately 2.7 million wage earners in Denmark. For many, their working wage is also their most important source of income.

The public sector receives most of its income from taxes on wage incomes. The tax on wage earners is therefore also society’s biggest source of income.

Whenever wages are paid a significant amount is taken for tax. The amount is clearly shown on each wage earner’s pay statement. This reduces the disposable amount each individual has for personal and family use.

Recent years’ changes in wage earner taxation

Most wage earners have probably seen their pay statement change greatly over the past few years as there have been marked changes in tax on wage income.

Tax rates have been reduced; both for people with high wages and not least for those with low wages. The highest marginal tax rate, that is income tax on the last earned Danish Crown paid by those with high incomes, has been reduced from 68 % to 63 % since 1993. The average marginal tax for wage earners has fallen since 1993 from 56 % to approx. 50 %.

In 2004, an employment allowance was introduced benefiting all wage earners. In 2008 this allowance was raised to 4 %, an increase that benefited all wage earners. This gives a total tax reduction of up to DKK 340 a month.

Many people can measure the fall in marginal tax in the form of a lower income tax rate. The income tax rate is the percentage of the wage that is deducted each time wages are paid according to the information the employer has received via the tax card. This states the rate at which earnings are taxable at source as well as deductions from taxable income.

At the same time as normal income tax was reduced, a labour market contribution were introduced. The labour market contribution appears directly on the pay statement.

The labour market contribution constitutes 8 % of the wage. As this contribution is deducted from personal income, it corresponds approximately to a tax of only 4 %. Marginal tax on people such as those with high incomes (including the contributions previously mentioned but not church tax) is therefore 63.0 %.

4.2. What is tax paid on?

Most people receive their wages in cash, which is paid into their bank account in a financial institution. Some are paid on an hourly rate. Others receive a monthly wage or wages for another limited period. In all cases, tax is collected on the cash amount paid. This also applies to cash sums paid as gifts or bonuses in connection with anniversaries or other special occasions.

But wages do not have to be cash. Many people receive parts of their wages as benefits in kind. These are popularly called fringe benefits. Regardless of whether wages are paid in cash or as fringe benefits, in general they must be taxed.

Fringe benefits are part of the wages. Therefore, as a rule the value of the benefits must be taxed as wages. This principle in income taxation dates back to the start of the 1900’s.

In order to tax a fringe benefit, it is necessary to assess their value. As a rule, it is the market value. This is, what it would cost the wage earner to buy/hire the benefit on the open market.

It can be difficult to know how much a fringe benefit is worth in exact terms. For that reason, several places in tax legislation include some simple models showing how to assess the value of the most common fringe benefits.

Below are the rules for the most common fringe benefits including both the taxable and the tax-free benefits.

Typical fringe benefits

Three typical fringe benefits which employers can make available for employees are company car, free accommodation and company telephone. Other benefits can be free pleasure boat, free TV and radio license and advantageous staff loan.

These are still benefits that can have widely differing values. The car can be large or small, as can the accommodation. You might use the car or the telephone extensively privately or not that much.

Some employees pay the employer a certain amount for using the fringe benefit. For example, there are many wage earners who pay an amount to use a company car. This amount is deducted from the value of the fringe benefit that has to be taxed.

To find the exact value of the fringe benefit in each individual case would require very complicated tax rules. It would also require significant control administration on the part of the tax authorities.

No one would benefit from such a difficult system. Instead the rules have been standardized. The value of the company car, accommodation and telephone are therefore assessed schematically.

Company car

A company car is a valuable fringe benefit. Many people enjoy a company car. In 2006, some 86,500 people made use of a company car.

If a tax-payer has a company car at his or her disposal, it is the value of having the car at one’s disposal, and not how much the car is used that is included as a part of the wage income.

If the car in question is a new car, the personal income for each of the first three years must be increased by 25% of the part of the new car price which does not exceed DKK 300,000 and subsequently by 20% of the rest of the new car price. If the car is more than 3 years old, the price is reduced to ¾ of the new car price but the calculation is otherwise the same. However, the new car price is always set to at least DKK 160,000 when making calculations.

This calculation basis has been chosen because taxation must correspond to what it typically would cost if the car expenses had to be paid for with money that was already taxed.

The taxable value of the company car is taxed in the same way as wages and is found in the same box as the wage income on an income tax return. The employer is obliged to withhold A-tax on the amount. The employer is also obliged to inform the tax authorities of the amount.

Free housing

If a wage earner has the use of free housing from his or her employer, the benefit becomes taxable. This is because the wage earner with free accommodation saves on private house expenses. This applies if it is a weekend cottage, a normal house or an apartment.

In 2006, 5,000 people had a year round residency at their disposal while around 12,500 made use of a weekend cottage for shorter or longer periods of time.

The value of the free accommodation is fixed according to rates agreed by the Board of Assessment and these are found in special forms.

The value of the free accommodation is found in the same box as the wage income on an income tax return.

Company telephone

Use of a company telephone is the most common fringe benefit. Approximately 180,000 people made use of a company telephone in 2006. If the employer covers expenses for a telephone in the home, mobile telephone etc. the person using it is taxed on the value of the company telephone.

It is not the telephone itself that is taxed but the expenses incurred using the telephone. That is the expense the employee saves. To make it as easy as possible, the value of a company telephone is set to DKK 3,000 (although no more than the employer’s actual expenses). This value applies, regardless of whether the telephone is used privately or for work-related conversations. Company telephone is B-income.

If you have your own expenses related to the regular telephone, mobile telephone, ISDN connection and other data connection made available by an employer, your taxation base can be reduced.   According to the set-off rule, this means that if the employer’s actual expense is DKK 3,000 or more, and if the household has expenses of DKK 3,000 for the telephone or data communication, there is nothing to tax.

Tax-free fringe benefits

Despite staff benefits being taxable, it has been politically decided that a number of staff benefits should be tax-free for the wage earner.

Initially, this applies to all benefits under a specified amount. In the second phase, it applies to the instances where the tax exemption can promote a specific political request.

Tax-free benefits

Many employees receive small benefits in the course of a year as part of carrying out their work. This might be a paid vaccination or a free newspaper to use for work. As a rule, these benefits should be taxed but it is impractical for both the wage earner and the tax authorities if all benefits have to be registered.

For that reason, a minimum amount has been introduced for taxing staff benefits, which employers have made available to help with the employees’ work. The minimum amount is DKK 5,400. This limit is revised annually. Therefore, a number of staff benefits under DKK 5,400 are tax-free. But if the minimum amount is exceeded, the total value of all benefits must be taxed.

However, the value of certain benefits is taxed with no regard for this limit and the value of these benefits is not included in the calculation of whether or not the minimum amount has been exceeded. This applies to the value of free board and lodging, when the valuation can be determined according to the established normal values set by the Board of Assessment, company car, free weekend cottage, free pleasure boat, company telephone, free permanent residence, staff loan and TV and radio license.

Furthermore, a practice has evolved where certain gifts from one’s employer are tax-free. These are typically Christmas gifts and other special occasion gifts such as birthdays or weddings.

Tax-free computer and data communication

Private use of a computer is also tax-free for the employee when the employer has made a computer and computer equipment available for staff to use for work.

A computer can also be a home work station. A home work station provides a flexible solution for many people on the labour market, for example people with children. This tax exemption contributes positively towards an increased flexibility and mobility in the labour market.

It is also tax-free for employees when an employer pays for their private data communication such as broadband. The tax exemption stipulates that the data communication connection must lead to the employee’s computer with access to the workplace’s network.

Tax-free healthcare

Employer-paid healthcare is tax-free for employees. This tax exemption applies to medical treatment of employees suffering from illness or accident, corresponding preventative treatment, treatment at a chiropractor and treatment for abuse of medicine, alcohol or other drugs. The contributions made by the employer to encourage employees to stop smoking (stop smoking courses and nicotine preparations) are also tax-free. If the employer has chosen to take out insurance cover for expenses incurred in treating the employee, the insurance premium is also tax- free for the employee.

The tax exemption is dependent on the expense being paid as part of the employer’s general staff policy for all company staff and on the employer’s insurance policy covering all company staff. However, this offer can be limited according to general criteria on length of service and number of working hours.

Access to tax free healthcare also covers self-employed business owners and co-working spouses.

Tax-free remuneration

Many wage earners have worked far from home for shorter periods of time. For example, many Danish craftsmen and builders have worked in the rebuilding of eastern European countries.

When people work far from home, they will often have greater expenses than if they worked close to home. These are expenses for board and lodging, meals at restaurants, cafeterias or similar.

Business expenses incurred during work related travel are payable by the employer on presentation of bills. In this way, the expenses are kept separate from the wage earner’s account with the tax authority.

However, not all employers cover these expenses by paying the bills. Therefore, it is also possible to pay tax-free allowances for travelling expenses, which are set at standard rates.

The employer can pay a tax-free allowance corresponding to the standard rate without any documentation for the actual expenses. The standard rate is set according to typical actual expenses. It is revised annually and is DKK 440 daily. The standard rate for accommodations is DKK 189 daily.

4.3. What can be deducted in tax?

Wage earners may deduct certain expenses in tax.

Typical tax-deductible expenses are the commuting allowance, unemployment insurance fund subscription, payments to an early retirement pension scheme, trade union subscriptions and other wage earner expenses. These allowances belong to the group on the income tax return called assessment oriented deductions.

Payments to pension schemes are placed on the income tax return in the box called allowance in personal income. The most common allowances are described below.

In fact, certain expenses are mostly private expenses but there has been a desire to make them tax deductible. This is because tax deductions support a desired behaviour in the wage earner.

Commuting allowance

Since 1985, the rules for the commuting allowance have been repeatedly simplified so that today only the distance between home and the workplace decides the size of the allowance.

Regardless of which method of transport you use, the commuting allowance between home and the workplace is calculated for the stretch that is the normal transport route for cars. The allowance does not increase because of, for example, the extra distance involved driving to the kindergarten to drop off or pick up children on the way to and from work.

The fact that the size of the commuting allowance remains the same regardless of the method of transport chosen gives commuters a free choice between car, bus, train, bicycle etc.

The deductible value of the commuting allowance is 33%.

A higher commuting allowance applies to commuters in fringe areas who have a long journey to work.

In 2008, commuting allowance rates are:

Allowance for trade union subscriptions, unemployment insurance fund subscriptions and contributions to early retirement pension.

In Denmark there is great support for trade unions and unemployment insurance funds. Over 80 % of wage earners are members of a trade union and over 90 % belong to an unemployment insurance fund. Most wage earners have chosen to insure themselves against a loss of income should they become unemployed.

Payments of unemployment insurance fund subscriptions can be compared with an insurance that replaces the loss of normal income if a wage earner loses his or her job. It goes without saying that it is in the interest of society to insure wage earners against unemployment. Subscriptions to unemployment insurance funds are tax deductible.

If a person wants to retire early, he or she has to pay a special contribution to an early retirement pension. This contribution is tax deductible in the same way as the subscription to the unemployment insurance fund.

The allowances for the subscription to trade unions, unemployment insurance funds and the early retirement pension are assessment oriented deductions that can be deducted on the income tax return in the same way as the commuting allowance. The taxable value is 33 %.

Allowance for double housekeeping

Because of work, it can be necessary to temporarily stay away from the family home. This leads to extra expenses for food and accommodation. To compensate for these, a person can receive an allowance for double housekeeping for a limited period.

The allowance is granted only as long as the stay away from the family residence is temporary.

If a person takes a permanent job in a new place, the stay is not temporary. In this case it is not possible to receive the double domestic arrangements allowance even though the family lives separately. This is because establishing two households is not necessary as it would be in the case of a temporary job.

The allowance for double domestic arrangements is DKK 400 per week. If a person wants to receive more than the DKK 400 allowance, his or her expenses must be documented.

Allowance for travel expenses

If when travelling for an employer an employee does not receive a tax-free allowance or the employer does not cover the expenses on presentation of bills, the expenses can be deducted on the employee’s income tax return. This only applies if the expenses together with other work related expenses do not exceed a limit of DKK 5,400. This limit is revised annually.

Pension contributions

Today, most wage earners pay into pension schemes. These payments are tax deductible. If the employer pays into the pension, the amount is not deducted on the income tax return. Instead, the paid amount is not included when assessing taxable income.

Labour market contribution - gross tax

8 % labour market contribution is deducted from the gross wage. This means that the wage earner does not pay income tax on this amount.

The labour market contribution was introduced in 1984 as an innovation in the Danish tax system. The labour market contribution is only calculated on incomes arising from commercial activities. If a person is in the labour market, he or she will pay an earmarked contribution, labour market contribution, which helps those people outside the labour market. The labour market contribution is solely used to finance a rage of specific national expenses regarding the labour market.

These are public expenses for daily maintenance benefits, sickness benefits, maternity and paternity benefits, educational expenses and expenses incurred with leaves of absence and other labour market provisions. From 1999 the labour market contribution also covers expenses in new areas such as flex jobs, sheltered jobs, rehabilitation and early retirement.

Effective in 2008, there is no longer an annual revision of the labour market contribution meaning that the 8 % rate is now permanent. The labour market contribution should have been reduced to 7,5 % in 2008, but there was a tax reduction instead. The tax reduction being in part an increased  employment allowance in part by a significant reduction of marginal tax for middle-incomes. The personal allowance is also raised with DKK 1,000.

The tax reductions will be implemented gradually in 2008 and 2009.

Tax free allowance for payments to ATP[1]

In addition to the labour market contribution, payments to ATP are also deducted before income tax is calculated on the wages. The amount paid in ATP is determined by the number of hours worked. ATP payments are received as pension payments when a person leaves the labour market. Read more about ATP in section 9.2.

The special pension savings of 1%

Finally, 1% of the gross wage is deducted for the special pension savings. These pension savings are also placed in ATP and are paid out when a person retires. Payment of the contribution is suspended in 2004-2008. See also section 9.2.

4.4. When tax has to be paid

Tax is calculated on the income earned in the course of a calendar year. Most of the tax is, as mentioned, collected over the year by the employer withholding a part of the wages before the employee is paid.

The amount retained by the employer is paid to the tax authorities as a provisional tax. At the end of the year, the accounts are done. This determines whether the A tax paid corresponds to the tax which has to be paid for the entire year.

Most people receive the regular income tax return, which the tax authorities complete with figures received from employers, financial institutions etc. The majority of the country s wage earners do not need to further supplement the advance income tax return with any more information. There are also many people who receive their annual tax statement with the advance income tax return.

The annual tax statement assesses incomes and allowances for the past year and is the basis for calculating tax as described in section 2.5.

Further information about the preliminary income assessment form, the income tax return and the annual tax statement can be found in section 11.