8. april 2016

Progression in the income tax system

On average, payment of taxes varies from 9% for those with the lowest incomes to around 47% for those with incomes of over DKK 1 million. Read more about distribution of income and taxes for all 4.9 million taxable persons in Denmark


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Progression in the income tax system

The Danish income tax system is progressive. This means that the percentage paid in tax increases as income increases, conversely to a proportional tax system, where tax makes up a fixed percentage of the income regardless of the size of the income.

This progression is built into the tax system by making the total taxes consist of different taxes that are collected on different tax bases. Some of the taxes have a lower limit allowance so that tax is not due on incomes under a certain level.

As the lower limit allowances are different in size or are not given at all, some of the taxes are collected on the entire income while other taxes are only due when the income reaches a certain level.

This is illustrated in the figure below. While labour market contribution is due on the entire income, a personal allowance is only given in the tax basis of the municipal and church tax, health contribution and bottom-bracket tax before tax is due. In addition to this, interest payable and tax allowance – including employment allowance – can be deducted from the tax base of the health contributions and the tax to municipality and church.

As the name implies top tax bracket is only paid on the highest income levels, i.e. the part of the income in 2016 which is above DKK 467,300. When a possible positive net capital income is included in the top tax base an allowance of DKK 41,900 for singles and DKK 83,800 for married couples is given.

Income taxation 2016

Note. Based on the tax rate in an average municipality of 25.6% including church tax in 2016. Tax rates vary from 23.06% in the cheapest municipality up to 28.94% in the most expensive.
* Including employment allowance of 8.3 pct. with a maximum of DKK 28,000

In table 1, all taxable persons are placed in income brackets according to the size of their personal income before the allowance for labour market contributions.

In 2016 the total income tax and property value tax is estimated to approximately DKK 389 billion. In addition, labour market contributions amount to approximately DKK 83½ billion (excluding labour market contributions made on employer-administered pension payments). The table shows how much the total income tax, property value tax and labour market contributions amount to in the various income brackets and the far right column shows the percentage of income made up by the sum of these taxes.

For the lowest level income groups, the personal allowance means that the total tax only accounts for a small part of the income. Therefore, personal allowance has a decisive role in the overall progression of income tax. For those with a typical medium level of income the tax proportion is around 28-32%. For those with a slightly higher income this rises to between 32-35% while those with the highest incomes pay on average between 44-48% of their income in total income tax.

Table 1. Taxable persons of different income brackets in 2014
Personal income before labour market contribution allowance Number of taxpayers Total income1) Income and property value tax Labour market contribution2) Income tax, property value tax and labour market contribution as a % of income. 1)
DKK (1,000) Pct. DKK bill. DKK bill. DKK bill. Pct.
Negative 10 0 -1.0 0.1 0.0 -
0 - 25,000 435 9 2.2 0.2 0.1 13.6
25,001- 50,000 120 2 4.4 0.1 0.2 6.8
50,001- 75,000 115 2 7.5 0.9 0.2 14.7
75,001- 100,000 120 2 10.6 1.8 0.3 19.8
100,001- 125,000 220 4 24.9 5.6 0.5 24.5
125,001- 150,000 355 7 48.7 12.0 0.7 26.1
150,001- 200,000 710 14 123.7 33.1 2.0 28.4
200,001- 250,000 445 9 98.9 26.7 3.3 30.3
250,001- 300,000 435 9 119.6 31.6 6.6 31.9
300,001- 350,000 480 10 156.5 40.9 10.6 32.9
350,001- 400,000 420 9 157.8 42.1 11.7 34.1
400,001- 500,000 530 11 234.6 65.1 17.8 35.3
500,001- 750,000 380 8 224.6 69.7 17.5 38.8
750,001-1,000,000 80 2 67.6 24.3 5.3 43.8
Over 1,000,000 55 1 87.3 35.0 6.7 47.8
All taxpayers 4,910 100 1,368.0 389.2 83.5 34.5

Note: The law model calculations have been made based on a random sample of 3.3% of the population in 2013, which have been estimated for 2016 based on December 2015 predictions.
1) Personal income before allowance for labour market contribution.
2) Excluding payments into employer-administered pension schemes

The degree of progression in the tax system depends on which indicator of income the tax is estimated as a share of. The wider the income base, the lower the average percentages. Here the average tax payment has been measured in relation to personal income before the allowance for labour market contribution. On this basis, average tax payments for all taxpayers constitute to 34.5%.

In the figure below, the average tax percentages from table 1 have been outlined in a graph. The light blue curve shows that the average tax increases in line with income. The horizontal (blue) curve in the figure shows the level for the average tax percentage for all groups combined (34.5 pct.) while the broken (black) curve shows how many taxpayers are found in the various income brackets.

In a proportional tax system with a tax rate levied on a taxation base consisting of personal income before the allowance for labour market contribution and with no basic allowance, a tax calculated at 34.5% would bring in the same amount as is collected under the current system.

The figure also shows that in this type of system, all taxpayers with an income below approx. DKK 375,000 would on average be worse off (the light blue curve is beneath the horizontal blue curve), and taxpayers with incomes over this amount would be better off (the light blue curve is above the blue). The majority of the population (see the black curve for the number of taxpayers who are on the left of the curves' point of intersection) would therefore - other things being equal - experience tax increases in comparison to the current system, while a minority of those with large incomes would benefit from very large tax breaks (see the distance from the horizontal curve up to the light blue curve).

Progression in the tax system 2016