Are you dreading the high Danish income taxes? Or, are you already paying too much? In this article, we dive deep into the topic of Denmark’s high income taxes and how they compare to the USA and the rest of the world.
Key points
- Income Tax System in Denmark: Denmark’s progressive tax system funds its extensive welfare state through various taxes, including state, municipal, and labor market contributions, with higher earners paying a larger share.
- Welfare Benefits Access in Denmark and USA: Denmark provides universal, free access to healthcare, education, and social transfers financed by higher taxes, while in the USA, many services are privatized and require out-of-pocket expenses.
- Comparison of Income Taxes: Denmark vs USA: Danish income taxes are higher, with an effective rate of 36%, compared to around 24% in the USA, but salaries are higher in the US; work hours and welfare benefits also influence overall economic comparison.
- Income Tax Rates and Effective Tax Burden in Denmark: In 2024, Denmark applies a 12% lower bracket and 15% higher bracket income tax, with an average effective tax rate on labor income of about 36%, and a tax ceiling rule that limits the maximum rate.
- Taxation Elements and Deductions in Denmark: Key elements of Danish income taxes include state and municipal taxes, pension deductions, employment deductions, and a 8% labor market contribution, with allowances such as personal and pension contributions reducing taxable income.
The video gives an introduction to the topic of income taxes in Denmark. Here you can see a numerical example of how much income taxes to pay in Denmark compared to the USA.
The artlcle describes income taxes in Denmark – the system in place with the main taxation elements. Income taxes are compared with those in USA. We also compare salaries before and after tax and access to welfare benefits in the 2 countries.
Income taxes in Denmark – the system in place
The Danish tax system is progressive meaning that higher earners pay a larger proportion of their income in taxes. It reflects a social contract based on the principle of solidarity between rich and poor citizens. Thus the tax system reduces income inequality measured at income after tax payment.
The tax system funds the country’s well developed welfare state. It provides services such as universal healthcare, education, and social security. Income taxes in Denmark has a relative high level compared to other western countries. Income taxes in Denmark account for about 25% of total tax revenues.
Taxable income also called the tax base consists of personal income of all kinds and capital income with reduction from allowed deductions.
Personal income can be salary, benefits in kind, self-employment income, pension income, etc. Capital income is net income from returns on different financial assets.
Key taxation elements for income taxes in Denmark
Income tax to the state
The Danish income tax is divided into State- and Municipal tax. The State income tax is progressive.
Bottom bracket: Applies to lower to middle incomes. The rate is 12%.
Top bracket: Applies to higher incomes. The rate is 15%. It applies to incomes over the threshold of DKK 600.000 or $88.000.
Municipal Taxes
The average municipal tax rate is 25%. This part of the income tax funds the 98 municipalities. Most welfare services take place locally such as schools, kidnergardens, elder care, and municipal roads.
Labour market contribution
It is a social security contribution at the tax rate of 8% on gross income and calculated before deductions such as personal allowances. It is a part of income taxes in Denmark for everyone, but it’s commonly referred to as ‘Arbejdsmarkedsbidrag’ og AM-bidrag. The collected funds subsidises the A-Kasse system, unemployment grants, and the job centers.
Church tax
The rate is 0,65 %. Municipalities imposes the church tax and it only charges members of the Danish State Church.
Danes and foreigners can opt out of paying church tax.
Deductions. Most important ones
- Personal allowance: The basic personal allowance is 50.000 DKK or 7.300 $. It applies to all tax payers.
- Pension contributions: If you have more than 15 years to state pension age you can get a deduction at 12% of your pension contribution payment up till 80.600 DKK. If there is less than 15 years till your retirement, the deduction rate is increased to 32%. The pension age is 69 years for individuals born after 1967. For people born after 1971 the pension age is 70 years.
- Employment deductions: Work-related expenses such as transport and union fees can be deducted. Further, all employed workers get an employment deduction of 10,65% of their income from work, with a maximum of 45.000 DKK. The purpose is to favor income from work over income from welfare benefits.
The tax ceiling rule and the effective income tax rate
The progressive tax system means that the marginal tax rate for an individual paying the top tax of 15% is around 56% as of 2024. Moreover, a special rule about the tax ceiling means that if your overall tax rate exceeds 52%, your top tax payment is reduced until the overall tax rate is below 52%.
Taxes to be paid after deductions are calculated on the monthly paycheck. The company gets the indivdídual tax information from the tax authorities and calculates the net payment to be paid to the employee after taxes.
To assess the tax burden from income tax compared to other countries (or between individual workers), it is not sufficient to only look at the tax rates. You also have to consider the level of deductions and specified tax limits (tax brackets). The effective tax rate takes this into account.
Regarding labor income, the average effective tax rate in Denmark is 36% as of 2023 according to OECD. (See also the table below in the section comparing Danish and US income taxes).
Tax on capital income
Capital income is part of taxable income, and you can earn interest from bonds and savings accounts or income from returns on shares or investment funds. Taxation of capital income is based on the resulting net income from all flows of capital income on a yearly basis. Net income from return on shares separately is taxed at 27% up to 61.000 DKK and 42% for net income in excess of this amount.
Favorable tax schemes for foreigners working in Denmark in a limited period
The Danish taxation rules distinguish between limited and full tax liability. Full tax liability applies to Danish residents and persons staying in Denmark for more than six months consecutively. In this case all your earned income – also from outside Denmark – is subject to taxation in Denmark. Limited tax liability implies that you are taxable on your Danish income but that you remain fully tax-liable in another country. The schemes described below are designed to give special favorable tax conditions for employees working in Denmark for a limited period.
The special expatriate scheme
This scheme – also known as the 27% tax rule – gives expatriates employed in Denmark the ability to apply for a favorable flat tax rate of 27% on their gross salary for up to 84 months. The guaranteed monthly salary before deduction of employee pension contributions, must be at least DKK 75.000 (in 2024) on average in the calendar year. Furthermore employees must not have been liable to tax in Denmark within the past 10 years.
The 27% tax rate is calculated on cash salary, employer-provided telephone, internet and company cars plus employer-paid health insurance. Labor market tax of 8% also applies. No deductions are allowed against the flat rate taxed income. If the employee stays after the 84-month period, the employee’s income is taxed at ordinary rates.
The workforce hire scheme
Workforce hire implies that the employee continues to be formally employed by the employer in the home country but is hired out to a company in Denmark. Employees under this scheme are taxed in Denmark at a favorable flat rate of 30% of the gross remuneration. No deductions are allowed. Labor market tax should be paid as well. If the stay in Denmark is expected to exceed six consecutive months within any 12-month period, it is not possible to use the workforce hire rules.
Other taxes
Consumption taxes
The Danish value-added tax (VAT) rate is 25%. Denmark is the only country in the EU that doesn’t have differentiated VAT. The debate is ongoing in Denmark whether to introduce differentiated VAT
Taxes on luxury goods
On goods such as sugar, liquor, and tobacco, there’s a special tax. A number of these taxes are expected to be reduced or abolished in the coming years. Recently, the special tax on chocolate was removed.
Save money on Electricity...
See the cheapest electricity prices in Denmark and save money.
Wealth taxes
There has not been a wealth tax since 1997 in Denmark.
Property taxes
Owners of property are liable to pay two types of property tax: property value tax and land tax.
Property value taxes are calculated as a percentage of the latest public property assessment. Property value tax annually amounts to 0.51% of the value of a property up to 9.200.000 DKK and 1.4% of the value exceeding 9.200.000 DKK.
From 2024, the land tax will be paid through your preliminary income statement and included in the tax payment on your paycheck. From 2024, the rate for land taxes will be reduced in all municipalities. On average, it is reduced from 2.7% to 0.74%.
Car taxes
The rates for registration duty in 2024 for passenger cars are 25% of the value up to 70.200 DKK, 85% of the value from 67.800 DKK up to 210.600 DKK, and 150% of the value in excess of 210.600 DKK. In addition, the green vehicle tax applies, which is a quarterly fixed tax to be paid on all cars based on the car’s fuel consumption.
Income taxes in Denmark compared to the US
Overall, it is extremely difficult to compare taxes in different countries. While tax systems are quite similar, they are also very complex.
The tax in Denmark is surely one of the highest in the world. But countries like France, Belgium, Sweden, and many other European countries have slightly higher taxes according to OECD – depending on how to measure the net tax burden.
Income taxes in the USA
The income tax in the USA consists of federal income tax and income tax paid to individual states and municipalities. The federal income tax is progressive with a rate of 10% for incomes up to 11.600 $ and 12% rate for income levels between 11.600 $ and 47.150 $. The rate for the highest incomes over 609.350 $ is 37%. The income tax paid to states ranges from 0-15% with a few states not collecting any income tax at all. Besides, employees pay for the Social security scheme and Medicare.
The current rate for Social Security is 6.2% of wages and 1,45% for Medicare. The employers pay the same rate as well. As in Denmark there are some allowed deductions to be made when calculating tax payment.
Income taxes in Denmark are higher than in the US
The average single worker in the US faced a net average tax rate from labor income of 24% in 2023, compared with the OECD average of 25%. For Denmark the average rate is 36% as the table below shows. This is the 4th-highest average rate among the 38 OECD member countries.
So the average income tax is higher for employees in Denmark than in the US. The tax burden, measured as all revenues from taxes and charges as a share of GDP, expresses the overall importance of taxes in society. The tax burden is 42% in Denmark, which is the 7th highest among OECD countries. In the USA, it is 28% as of 2022. Some years ago, the tax burden in Denmark was among the highest in OECD at around 45%, but have fallen in recent years.
Tabel: Average effective tax rates on labor income in selected countries
| Country | Average effective tax rate on labor income in 2023. (Pct-points). |
| Belgium | 39,9 |
| Germany | 37,4 |
| Denmark | 36,0 |
| OECD average | 24,9 |
| USA | 24,2 |
| United Kingdom | 23,7 |
| Spain | 22,1 |
Source: OECD-report on average tax rates on labor income for 2023.
Salaries on a monthly or yearly basis are higher in the US than in Denmark
To compare how much you can consume of goods and services with your salary in the 2 countries, you must adjust for differences in price levels in the two countries. The gross domestic product (GDP) per capita adjusted with purchasing power parity is 76.300 $ in the US as of 2022 and 71.300 $ in Denmark. statistics about GDP per capita. Average annual wages in 2022 in Denmark was 65.300 $ and 77.000 $ in the US. The OECD average is 55.500 $.
Danes work fewer hours than US citizens – so the earned wage per hour after tax is about the same
A main reason for the higher annual wages in the US than in Denmark is that employees in the US on average work considerably more hours per month or per year. When workers consider the trade-off between work and income (which are taxed) on one hand and leisure (not taxed) on the other hand, the tax system in Denmark creates incentives to choose more leisure on behalf of work compared to the US.
This explains partly why the working week is generally shorter in Denmark and the spread of work-life balance initiatives such as the 4-day working week and part-time jobs. This is described further in the article about work-life balance.
Average monthly salary after tax is 4.500 $ in the US and 3.700 $ in Denmark. Statistic about monthly salary after tax across countries. Taking into account that US employees on average work 25% more hours per month than Danish employees, the average wage after tax per hour is the same – namely 27 $ in US and 27 $ in Denmark. The hourly wage before tax is calculated to an average of 43 $ in the US and 47 $ in Denmark.
Save money on Electricity...
See the cheapest electricity prices in Denmark and save money.
A high level of productivity in a well-educated workforce is an important reason for the high hourly wages in Denmark. Furthermore high tax levels will spill over to wages and prices and impact the wage negotiations between employers and employees.
Access to welfare benefits in USA and Denmark
Access to welfare benefits in USA
In the US many welfare benefits are not made available to the citizens by the public sector on a free and universal basis. So US citizens have to pay for these services in the private market. This is the case for college tuition fees, child care, some health care services and more.
Further, the income transfers available in the US are considerably less generous economically and with lower coverage. Such factors are part of the full picture and should be considered when assessing how attractive the 2 countries are to work and live in.
Access to welfare benefits in Denmark
As mentioned the income taxes in Denmark is significantly higher than in the US. The other side of that coin is a well-developed welfare state – financed by these taxes and charges – giving free access to welfare benefits in the form of income transfers and services.
Important income transfers include insurance benefits paid at unemployment, sickness or maternity leave, state education grant (called “SU” in danish), early retirement pension, housing benefit, and child benefit. So many of these income transfers are income-dependent and reduced by higher personal income. Also each transfer has rules and criteria that must be fulfilled to be eligible for the transfer.
Services cover all citizens and are free. It gives access to child care, education, and health care. For kindergarten and nursery, as an exemption, the parents are required to pay up to 25% of the costs. Education is free and consists of primary school, high school, and higher education. Health care services give the right to treatment in hospitals and general practitioners, home care, and nursing homes. Services are at least as important as income transfers in the Danish welfare state, and more citizens meet the welfare state through the services than through the income transfers.
Conclusion – income taxes in Denmark
The income taxes in Denmark are relatively high compared to other western countries. Among OECD-countries the tax burden is the 7 highest and the average effective tax rate on labor income is the 4th highest. And income taxes are significantly lower in the USA. Also, salaries on a monthly or yearly basis are higher in the US.
But when also considering the work-life balance in place in the two countries and the average hours worked per month or year, the resulting comparison changes a lot. With a shorter working week and more paid holiday weeks in Denmark ( 5 weeks and for some groups even 6 weeks) the average wage after tax per hour worked is about the same in the 2 countries.
The higher income taxes in Denmark is accompanied by a much larger welfare state – financed by these taxes. This includes universal and free access to welfare services such as health care and education at all levels. Also the benefits in form of income transfers are significantly higher in Denmark and covers more indviduals. This includes insurance benefits paid at unemployment, sickness or maternity leave, state education grant (called “SU” in danish), early retirement pension, housing benefit, and child benefit.
Save money on Electricity...
See the cheapest electricity prices in Denmark and save money.
In the US, citizens have to pay for many of these services in the private market as they are not provided by the public sector. Such as college tuition fees, child care, some health care services and more. Also the income transfers avaiable in USA are less generiously in economical terms and covers less individuals. Such factors are part of the full picture when assessing how attractive the 2 countries are to work and live in.
More information
If you want advice on taxes in Denmark, we have created this page, where you can find information on tax advisors in Denmark.
FAQ
What access to welfare benefits do Danish citizens have compared to Americans?
Danish citizens benefit from extensive welfare services such as free healthcare, education, and various income transfers, financed by higher taxes, whereas in the USA, many such services are privatized, requiring individuals to pay out of pocket or through insurance.
How do income taxes in Denmark compare with those in the USA?
On average, Danish income taxes are higher, with an effective labor income tax rate around 36%, compared to approximately 24% in the USA; however, salaries are higher in the USA, and taxes are offset by differences in work hours and welfare benefits.
What are the main components of income taxes in Denmark?
Income taxes in Denmark are comprised of state tax, municipal tax, labor market contribution, church tax, and deductions such as personal allowances and pension contributions, all contributing to funding a comprehensive welfare system.
How does the Danish tax system support social equality?
Denmark’s progressive tax system ensures that higher earners pay a larger proportion of their income in taxes, which helps reduce income inequality and funds the country’s extensive welfare benefits.
What are the different tax rates applied to income in Denmark in 2024?
In 2024, the Danish income tax includes a 12% rate for the lower to middle-income bracket and a 15% rate for higher incomes above DKK 600,000, along with municipal taxes averaging 25% and an 8% labor market contribution.
