Understanding Switzerland’s Tax System Part 2: Income Tax, Withholding Tax and Marital status in taxation
Articles about Switzerland
Switzerland: Understanding Switzerland’s Tax System PaRT 2: Income Tax, Withholding Tax and Marital status in taxation
This writing is part of a series of articles that I am planning to write about the country of my current residence. You can find the links to my previous articles at the end of this document.
This article is the second one about the Swiss tax system. In the next articles, I plan to introduce social security system, capital gains tax and wealth tax.
Later on, I plan to cover corporate taxation. After that, I might write about founding a company in Switzerland, including business opportunities and more.
So, let’s get started.
Part 2: Understanding Switzerland’s Tax System
Income Tax: General
The final income tax in Switzerland is always subject to various factors, such as deductions, marital status, the number of dependents, specific cantonal and municipal tax regulations, additional sources of income, eligibility for tax credits, and any applicable tax treaties. Therefore, your individual case requires a detailed study, especially if you are about to make some related decisions.
When you compare your potential tax burden with that in other countries, it's important to note at least two things: 1) social contributions are not directly included in Swiss income taxation, and 2) healthcare is not included, but you are obliged to take separate insurance. The social security system differs and may need its own shorter article later.
I will leave the calculations to you because they are complicated, subject to interpretation, and ultimately personal. In my next article, I will provide you with some useful links which you can use to study your personal case.
Progression and Local Salary Levels
Switzerland uses a progressive tax system. I would estimate the tax progression as ranging from low to moderate. In Europe, Estonia, Bulgaria, Hungary, and Romania have flat tax rates.
On a national level, the average personal income tax rate in Switzerland is often reported to be around 22-25% for typical income levels. However, this figure might be misleading as it significantly varies based on the canton and municipality, specific local tax policies, deductions, family status, and other factors. This average rate may also be influenced by the higher amounts of taxes paid by high-income earners. Therefore, it would be essential to consider also the distribution of tax rates (median) and the detailed tax data across different income levels before drawing conclusions from this single figure.
Regarding typical income levels, according to the Swiss Federal Statistical Office, the median gross monthly salary in Switzerland is close to CHF 7,000, amounting annually to about CHF 84,000. The average monthly salary is higher, roughly CHF 7,500. In finance and insurance, healthcare, and IT, salaries are generally higher. Cantons may set minimum salaries, and some have currently done so. The lowest minimum salary is in Ticino, around CHF 20 per hour.
Deductions and allowances in Switzerland are generally considered generous and can significantly lower the effective tax rate. Additionally, contributions to private pension savings are tax-deductible, reducing taxable income. Families, in particular, benefit from deductions and allowances for children and dependents. There are also special allowances for first-time homebuyers and substantial education-related expenses.
Note that in Switzerland, rental income is subject to income tax, not capital gains tax.
According to my quick study, the top marginal tax rates and respective thresholds (in parenthesis) based on annual income are approximately as follows:
Finland: 44% (at €150,000)
Germany: 45% (at €278,000)
Switzerland, Geneva: Approximately 46.5% (at CHF 500,000-755,000)
Switzerland, Zug: Approximately 24.5% (at CHF 300,000-500,000)
Please note that these figures are only for illustrative purposes, and the numbers may change.
As you might have already noticed, this data clearly suggests that Switzerland, particularly in cantons like Zug, offers significantly lower tax rates for high-income earners. In contrast, countries like Finland have relatively low thresholds, making their tax systems more progressive at lower income levels.
Withholding tax
Foreigners typically receive a B-permit for their initial residence permit. B-permit holders are generally subject to a withholding tax on their salary, which is deducted directly by their employer to ensure that foreign workers meet their tax obligations. Withholding tax is deducted at the source from income such as interest, dividends, and lottery winnings, with a standard rate of 35%. Withholding tax on employment income for B-permit holders, however, can vary based on the canton and individual circumstances. This tax can be seen as a prepayment, and at the end of the tax year, excess taxes can be refunded or credited.
In contrast, for Swiss citizens and residents with a C permit, taxes are typically paid after the tax year ends. Prepayments are often made based on estimated income and wealth, spreading the tax burden throughout the year. Many cantons require prepayments, though the strictness of this requirement can vary. The Swiss tax system reflects a higher level of trust in its citizens, as the requirements for payments are not overly inflexible.
Marital status in taxation
Marriages in Switzerland bring an interesting aspect to taxation. Unlike in countries where couples can choose to be taxed individually or jointly, Swiss couples do not have this option. There are, however, deductions and allowances available to help reduce the tax burden. Again, there are cantonal differences. Although theoretically possible, divorcing "on paper" for the purpose of avoiding taxes is not advisable due to the legal principle of "substance over form" and the vigilance of tax authorities. Attempting to manipulate marital status purely for tax benefits is risky and likely ineffective.
As you might guess, the taxation of married couples, often referred to as the "marriage penalty," has been a significant topic of debate. Despite the narrowly rejected popular vote held in 2016, the Swiss Federal Council has continued to advocate for individual taxation and recently proposed a reform to allow married couples to file their taxes separately.
Summary
Swiss income taxation reflects a system built on trust and flexibility. Comparing Swiss taxes to those in other countries highlights unique aspects such as separate social contributions and healthcare, generous deductions, and a high degree of regional variation. The local salary level is also reflected in taxation, mainly through higher marginal tax rate thresholds.
In the next article, I will briefly introduce the capital gains tax, wealth tax, and the social security system, as social security is not directly included in income taxation. You will also get some interesting links where you can try how your taxation would look in Switzerland. If you are living in another EU country, you might be surprised.
As always, I would greatly appreciate your comments and feedback. Your input helps me write better articles for you.