May = Holiday money month! But watch out for the tax surprise...

For many employees, May is a celebration month: holiday pay is coming! A bonus, often good for 8% of the gross annual salary. A good time to start dreaming about a week in Spain, a new barbecue or just some extra buffer in the savings account. But beware: what you get in your net account does not only depend on the amount you accrue in gross holiday pay. This is because there is a catch - the special rate.

What is that ‘special rate’ anyway?
The special rate is a special tax rate that applies to special remuneration. Think of a thirteenth month, a bonus, and indeed: holiday pay. Because this kind of income does not recur every month, it is taxed separately.

The tax authorities look at your total annual income and determine on that basis what percentage of tax should be deducted from your holiday pay. This percentage varies from person to person and can go up to over 50% on high incomes. That sounds hefty, and it can be.

And where does it go wrong?
If the employer applies the wrong special rate (e.g. too low a rate), the employee gets more net holiday pay at the time of payment than he or she is actually entitled to. That seems nice, but the bill comes later: when the income tax return is filed the following year. Then there can be a nasty surprise on the mat in the form of an amount to be paid. Often, the misapplication of the special rate is not noticed because most are also entitled to deductions such as mortgage interest deductions. But if your tax return consists only of salary and nothing else, you will find out when you file your tax return.

For employers: please double check!
Make sure the correct special rate is set in the payroll system. This rate is usually calculated automatically based on the employee's so-called cumulative annual salary, but it pays to check it carefully, especially for new employees or when there are multiple employments or part-time jobs.

For employees: an extra reason to check your payslip
Are you getting your holiday pay? Then take a look at your payslip. Is there a special rate listed there? And does the rate seem reasonable compared to your annual income? In doubt? Check with your employer or payroll department. Better to have a clear answer now than an unexpected blue envelope later.

In conclusion
Holiday pay is meant to be a nice little extra, and it should stay that way. With a little attention to the right tax rate, we can avoid surprises. So employers: check your settings. Employees: check your strip. And after that? Enjoy the sun, an ice cream and maybe a well-deserved holiday!