Income tax: how the brackets work

1. From pay to taxable income

Tax is not calculated on gross pay. You start from the year’s gross pay, take off personal social security contributions (see from gross to net), then professional expenses: a lump sum, or actual expenses if you can prove them (actual expenses or lump sum). What is left is taxable income.

2. The bracket scale

Taxable income is split into brackets. Each rate applies only to the part of income within its bracket.

For €30,000: €16,720 × 25% + €12,790 × 40% + €490 × 45% = €9,516.50 of basic tax.

3. The tax-free amount

Part of income is not taxed: the tax-free amount, €11,550 for a single person on 2026 income. It gives a tax reduction calculated at the rate of the first bracket: €11,550.00 × 25% = €2,887.50. It is higher with dependent children.

Tax due to the State: €9,516.50 − €2,887.50 = €6,629.00.

4. Average rate and marginal rate

The average rate is tax divided by income. The marginal rate is the rate of the highest bracket reached: it tells you how much tax is taken from one more euro. A higher bracket only affects the euros above it: as far as income tax goes, a pay rise always increases income after tax.

5. Municipal tax, withholding tax and the tax assessment notice

The municipality adds its own tax: a percentage of the tax due to the State, set by each municipality (your municipality’s tax). During the year, the withholding tax deducted from pay is an advance on this tax. After the return, the FPS Finance sends the tax assessment notice: a refund if the advances were too high, otherwise an extra payment (refund or extra payment).

Frequently asked questions

What next?

• Next lesson: what an employee costsGross, net and cost to the employer.
• For teachersThe six-session sequence, the worksheets and the answer keys.
• The test20 points, two versions, the marking scheme and the answer key.