New taxation law increases incentive for contributing towards your pension savings

In the beginning of February, the Danish Parliament passed a law that increases the incentive to pay contributions towards your pension savings. The law passed on 1 June with retroactive effect from 1 January 2018. The primary purpose of the new legislation is to compensate for the deductions in public benefits that many people experience come retirement if they have large savings.

New tax deduction for pension contributions

Danish Parliament has passed a law that introduces a new additional tax deduction scheme for pension contributions up to DKK 70,000 per year. The purpose of the new scheme is to compensate for the deductions in public benefits that people with large savings experience once they retire, previously making it unattractive to contribute towards your pension savings with some people even experiencing a marginal tax rate of more than 100 percent.

The new scheme introduces a deduction amounting to 12 percent for people with more than 15 years to public retirement age, while people with less than 15 years to retirement can enjoy a 32 percent tax deduction. In an average Danish municipality, the annual tax savings will – once fully implemented in 2020 – be up to DKK 2,200  for people with the low tax deduction and up to DKK 5,800 for those with the high deduction percentage. The new tax deduction will be applied by Danish tax authorities automatically, and everyone that contributes towards a pension savings that will be paid out in installments or as an annuity is eligible.

In addition to the above, Parliament also introduced changes to the employment allowance. These changes also have the effect of increasing incentive to build your pension savings.

If you have any questions, please do not hesitate to contact you broker at Aon.