Personal finances: 2016 focus areas
Within the tax and pension area, rates and regulations change regularly, and your job and income situation may also change from one year to the next. In order to make the most of your income and your savings, it is important to keep updated on the latest changes.
Top-bracket tax
If your salary exceeds the top-bracket tax limit in 2016, you may get a tax advantage from paying the excess amount into your pension plan. This will be the case if you expect your pension payouts to only be subject to bottom-bracket tax instead of top-bracket tax. The top-bracket tax limit increases every year up until 2022 as part of the 2012 tax reform.
The top-bracket tax limit is the maximum amount you can earn before having to pay top-bracket tax on the last earned Danish krone. In 2016, the top-bracket tax limit stands at DKK 467,300 after labour market contribution. The maximum tax rate – the top-bracket tax – is 15 %, which is added to the other tax rates. This corresponds to an average total marginal tax rate – i.e. tax on the last earned Danish krone - of 52 %*. The incumbent government aims to reduce the top-bracket tax, however mid-January 2016, the negotiations have been postponed until autumn.
Remember that you can up your pension payments at My PFA
Changing jobs
When you change jobs, you often also switch to another pension company. This means that throughout the course of a working life – and on average five-six job changes – pension pots will be placed with several pension companies. Pension savings entail a number of expenses and the size of these expenses is proportionate to how many places you have savings.
This can turn out to be costly for your pension as the expenses, such as administrative fees, may be fixed and, if they exceed the return, your savings will gradually shrink. It only takes a minute to collect all your pension plans. Doing so saves money and also makes it much easier for you to get an overview of your pension. However, other factors may influence whether it will be an advantage for you to collect your pension plans. Please feel free to contact us if you would like advice on the matter.
PFA does not charge a fee for transferring company pension plans to PFA.
Instalment pension
You need to make sure that your payments to instalment pension do not exceed the maximum. This year, the limit for payments to instalment pension is DKK 52,400. If you only have instalment pension through PFA, you do not risk making too large payments as PFA monitors your payments regularly.
Most people in Denmark can look forward to a lower tax burden in 2016 as the employment allowance and top-bracket tax limit have been increased. In return, the deduction for interest expenses has been reduced.
Below, you find an overview of the most important things to be aware of if you want to make the most of your money in 2016.
If you have any questions, please call PFA’s Advisory Services Centre at (+45) 70 12 50 00.
Pension
| Pension type | Taxation 2016 | How does this affect you? |
|---|---|---|
| Instalment pension | You can pay up to DKK 52,400 with full tax deduction (DKK 51,700 in 2015). If you have paid in too much during 2015, it will appear from your tax assessment notice, which your receive around 10 March. | With a flexible payout period between 10 and 25 years and with full tax deduction, instalment pension is the most popular pension type. |
| Life pension (also called annuity) | Full deduction if you make payments through your employer. If you make private payments, special rules apply. | Just like ATP and public old-age pension, life pension is paid out for as long as you live. In recent years, life pension has become increasingly popular. This is partly because life expectancy is increasing and partly because life pension has become more flexible so that a larger part now can be secured for your next of kin. |
| Old age savings | You can pay in up to DKK 28,900 in 2016. The payments are not deductible but, in return, the payouts are tax-free. The return is subject to the low tax rate of 15.3 %, just like instalment and life pension. | Like its predecessor endowment pension, old age savings can be paid out either in parts or as a lump sum. Old age savings can be an excellent supplement to your other pension savings and, under the existing legislation, it is not set off against the pension supplement of the Danish public old-age pension. |
| Endowment pension | You can no longer make payments to an endowment pension. Any endowment pension already accumulated will be subject to a 40 % flat-rate tax on payout. | Endowment pension has been replaced by old age savings. You can establish an old age savings plan if you would like an extra supplement to your other pension savings. |
Taxation
| Tax rule | How does it work? | How does this affect you? |
|---|---|---|
| Top-bracket tax | The top-bracket tax limit is now DKK 467,300 after labour market contribution (DKK 459,200 in 2015). | As part of the 2012 tax reform, it was agreed to raise the top-bracket tax limit further up until 2022. If you pay the top-bracket tax, you may consider upping your pension payments. |
| Deduction for interest expenses | Everyone who pays interest is entitled to deduction for interest expenses, which this year will be reduced by one percentage point. However, this only applies if your interest expenses exceed DKK 50,000 or DKK 100,000 in total for married couples. In this case, the deduction rate has been reduced to 28.6 %. During the years to come, the deduction rate will be reduced further to 25.6 %. | |
| Employment allowance | The employment allowance has increased from 8.05 % to 8.30 %. In DKK, this means an increase in the maximum allowance from DKK 26,800 to DKK 28,000. Single parents are entitled to an additional employment allowance of 5.6 %. | |
| Child benefits | The child benefits have been reduced by 2 % of any income exceeding DKK 732,900 that each spouse earns. |
*Tax on income after labour market contribution