Just starting out on your own? Take advantage tax-wise of advance payments
Although you are not obliged to make any advance payments as a newly self-employed person or freelancer, doing so voluntarily can bring tax advantages. Find out how it works.
Whether you’re an employee, a civil servant or self-employed, you have to pay taxes on your income. For employees and civil servants, these are deducted (in part) monthly from the salary. With a self-employed person, it’s a different story. After all, it is more difficult to know exactly how much you will earn each month. However, you can pay taxes during the current year, without waiting for the end of the financial year (and then having to pay the full amount in one go).
In principle, as a self-employed person, you pay part of the taxes you think you will owe for that year, four times a year. You estimate the amount of the advance payments based on the profits you expect to make in the current year.
What are advance payments and what options do you have? Find out in this article
Making advance payments as a newly self-employed person
However, if you are starting a self-employed activity for the first time as a main occupation, you do not have to make any advance payments for the first three financial years. Nor are you at risk of a tax increase if you don’t make advance payments. Yet many first-time self-employed people do make advance payments. There is a good reason for this.
Indeed, starting self-employed persons without a company and liberal professionals (not applicable to small enterprises) are eligible for a tax reduction in the first three years if they have made sufficient advance payments. In other words, by making enough advance payments, you get a discount on your taxes at the end.
For the assessment year 2022 (income 2021), the amount of such tax credit is equal to the sum of:
- Amount of the 1st advance payment x 1.50%
- Amount of 2nd advance payment x 1.25%
- Amount of the 3rd advance payment x 1%
- Amount of the 4th advance payment x 0.75%
In order to be entitled to the reduction (also called bonus), you must have already paid 106% of your final tax due in advance. In other words, you must have already paid 'too much' tax in advance.
It is best to make as many advance payments as possible in the first quarter, as this yields the highest tax benefit. Good to know: The bonus applies not only for the first three years, but also afterwards. And if you make more advance payments than necessary to avoid the tax increase, you will of course get back the surplus.
What if you don't have enough funds for the advance payments?
You may be convinced by now that making advance payments is an attractive idea. But perhaps you prefer not to draw on your own resources or you don’t have the means at the moment? Then a financing contract can offer a solution. Such a contract means that your bank finances the advance payments for you. This is attractive for several reasons:
- Firstly, because you can deduct the interest from your taxes.
- And secondly, because you have less administration to do: ING transfers the amount directly to the tax authorities, without you having to arrange much. And the earlier in the year you repay the loan, the lower the interest rate