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How does income tax in Denmark compare to the rest of the Nordics?

How does income tax in Denmark compare to the rest of the Nordics?
Photo: Mads Claus Rasmussen/Ritzau Scanpix
How different is the Danish income tax system from that in countries with similar models – and is it more expensive?

Denmark is known for having one of the world’s highest income tax rates, but how does the system break down and compare to the other Scandinavian nations?

We've compared the Danish income tax system and tax rates with those in neighbouring Sweden and Norway.

Although there's no straightforward answer to which country is more expensive — the overall income tax rate a person pays depends on individual circumstances — the analysis shows some interesting differences, as well as similarities, between the three countries.

Income tax in Denmark is divided into a number of components, of which the most important are the two state taxes, basic and top tax (bundskat and topskat); municipal tax and labour market tax (AM-bidrag).

The simplest of these, the labour market tax, comprises 8 percent of personal income.

The state taxes consist of the basic tax of 12.14 percent (in 2020). Earnings over the topskat threshold of 531,000 Danish kroner (72,300 euros) are taxed at a rate of 15 percent. The maximum overall tax rate for this top margin of income cannot exceed 52.06 percent (in 2020).

Municipal tax is the personal income tax which covers municipal services. The amount paid by individuals is dependent on the municipality in which they live and municipalities generally decide their own rates within limits set by the government. As a result, the municipal tax rate can range between about 22 and 27 percent depending on address. The average municipal tax rate in 2019 was 24.93 percent.

Denmark also has a small church tax, which is applied at a flat rate. The exact rate depends on the municipality, but averages at 0.674 percent. Only members of the Church of Denmark (Folkekirken) pay this tax, so foreigners who have moved to the country in adulthood (as well as people of other religions) generally won’t see it on their tax slips.

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Municipal tax is added to the other basic taxes, AM-bidrag and bundskat, as well as topskat for high earners, to calculate an individual's overall income tax payment.

As well as income from employment, other types of personal income are included in the tax calculation. These can include pension distributions, social security benefits, property earnings, remuneration for advisory assistance and dividends from Danish companies.

A complex list and system of deductions (fradrag) is used by the Danish tax model, with deductions applicable to the various types of income or tax base.

A key deduction is for employment expenses. Up to 10.5 percent of employment income up to a limit of 39,400 kroner (in 2020) can be deducted from the taxable income. Other deductions can be given for charitable contributions, child support maintenance and union and a-kasse membership fees. Losses on debt are not generally deductible.

In Sweden, national tax of 20 percent is only paid on annual income over 509,300 Swedish kronor (49,100 euros) as of 2020. If you earn less than the lower limit, the national tax is not applicable.

In addition to national tax, local or municipal tax must be paid. This consists of two parts: the tax you pay to the municipality (kommun) where you live and the region (landsting). So if you for example live in Malmö, your taxes go to Malmö City Council and are used to fund, for example, schools, and Region Skåne, which is responsible for healthcare.

The average municipal tax rate in Sweden is 32 percent, but it can reach as high as 35 percent depending on where you live.

READ ALSO: MAP: Here's how much tax you'll have to pay in Sweden in 2020

Deduction rules can enable you to reduce your overall tax rate by earning a fair bit more than the 509,300 kronor limit without actually having to pay the national tax.

The basic deduction — how much you can earn before calculating municipal and national tax — shifts a bit depending on income but also age. It is between 13,900 and 36,500 kronor annually for under-65s, with a fixed amount of 20,100 kronor for low income earners. 

Expenses incurred during fulfilment of employment can generally be deducted from the income on which you are taxed. These include things like travel expenses, car expenses, living allowances on business trips, necessary literature and tools of the trade. For travel between home and work, expenses must exceed 11,000 kronor to be deductible.

Norway’s general income tax (skatt på alminnelig intekt) has a flat rate of 22 percent. This covers not only income from employment, but also from business and capital. Tax allowances, expenses, and certain losses are deductible.

The general income tax in Norway is divided by three recipients: county tax, municipal tax and state tax.

READ ALSO: Taxes in Norway: Everything you need to know about how much tax people pay

In addition to the flat rate general income tax, bracket tax (trinnskatt) is added for personal income of higher earners.

In 2020 (as in 2019), personal income between 180,800-254,500 Norwegian kroner (16,700-23,480 euros) is subject to a bracket tax of 1.9 percent. This increases to 4.2 percent for income of 254,500-639,750 kroner (23,480-59,000 euros); 13.2 percent for 639,750-999,550 kroner (59,000-92,200 euros) and 16.2 percent for personal income above this upper limit.

Benefits in kind and pensions, as well as income from employment, are liable to personal income tax.

A number of deductions can be applied to the income against which tax is calculated. These include the personal deduction (personfradrag) of 51,300 kroner; and a minimum deduction (minstefradrag) designed to cover standard expenses connected to employment. Other costs like charity and union contributions are also deductible.

Sources: PWC (1) (2) (3), SCB, Regjeringen, Skat, Skatteverket (1), (2)


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