Sweden is one of the most prosperous countries in Europe and enjoys a very high quality of living. It also has a reputation for having one of the most generous welfare states in the world. However, this comes with a price. Swedes know this better than anyone.
Sweden is also one of the countries where citizens pay the most taxes. If you are considering moving to Sweden, it is important to consider and understand its tax system.
According to WorldData.info, the cost of living in Sweden is quite high. To be specific, prices are 9.3% higher than in the United States and about 2% higher than in the UK.
The Scandinavian country has its own currency, the Swedish Krona (SEK).
Throughout this analysis we will see the amounts for income tax brackets both in Swedish Kroner, and their equivalent in Euros and US Dollars. For this we will use an approximate exchange rate of €1/$1 = 11 SEK.
We kick off our analysis by looking at how labor income is taxed.
As in most developed countries, labor income is subject to social securities contributions in Sweden. And these are pretty onerous here.
Both the employer and the employee must make contributions to the Swedish social security. Though it is employers who burden most of the cost.
Thus, employers must pay the equivalent of 31.42% of the worker’s gross salary in social security contributions. Although this percentage is close to the average for Western European countries, there is an important difference between Sweden and the rest.
Sweden has no maximum base on which social security payments are calculated. This means that, even for workers with multi-million-dollar salaries, employers must continue to pay that 31.42%. In most countries, there is a maximum base above which nothing or very little is paid to the social security.
As far as employees are concerned, they must pay 7% of their gross salary to the social security. Unlike for employers, workers only have to pay social security contributions on their first SEK 537,200 ($48,836/€48,4836) every year. This means they do not have to pay social security above that amount.
Therefore, the maximum amount to be paid by an employee to the social security will be SEK 37,604 ($3,419/€3,419) per year.
If we combine the amounts paid by both employer and employee, it turns out the first SEK 537,200 in gross salary are subject to a combined social security rate of 38.42%. Above that figure, the rate goes down to 31.42%.
Apart from the social security, workers in Sweden also have to pay income tax.
Swedish income tax is paid to both the Swedish government and the municipality where we reside.
The municipal income tax rate is flat and varies very little by municipality, with the average being 32.28%. This rate applies regardless of the income level.
The portion of income tax paid to the central government follows a progressive structure with the different rates.
The first SEK 537,200 ($48,836/€48,4836) are subject to a 0% rate. Anything above that figure will be taxed at 20%. Realize that it is the same amount above which workers no longer have to pay for social security.
Thus, if we add both the municipal and central government rates, we are left with the following progressive income tax structure:
However, taxes are not calculated on our entire income, but after taking into account some deductions. For example, we can deduct our commuting costs from our income.
On the other hand, once we have applied our deductions and calculated what we would have to pay, final amount payable may be reduced further. Two concepts should be highlighted here:
First, everyone is entitled to a universal reduction of between SEK 14,000-36,000 ($1,273-3,273/€1,273-3,273) of payable taxes every year. That reduction is higher for middle income earners than from either low income or high income people.
Second, there is also a reduction known as the worker tax credit, which depends on the individual’s gross income:
Finally, so that we can understand the total tax burden on labor income in Sweden, it is useful to look to compare the employer’s total labor costs with the worker’s net salary. It gives an idea of how much goes to the state and how much to the individual.
For our analysis, we will take a worker who is unmarried and without children, who does not claim any of the optional deductions, only the universal and worker’s tax credit.
The following table shows various levels of income for workers, how much the company has to spend in social security contributions to employ them, their final net salary, and the total level of taxation:
As you can see, the total tax burden on earned income in Sweden is extremely high. If we take into account the employer’s contribution to the social security, the tax burden for the lowest incomes is already 50%.
And that percentage continues to increase, topping out at over 60% for the highest earners.
If we are in a situation where we have savings and investments, it is important to know what taxes will apply to that.
There are various ways to make money from our asset base. We can either collect income in the form of dividends, interest, or rents. Or we can realize capital gains by selling assets at higher prices than what we paid for them.
Regardless of the type of capital income received or their amount, it will be taxed at a flat rate of 30% in Sweden.
It should be noted Sweden has no wealth taxes.
As far as companies operating in the country are concerned, they will have to pay taxes on the profits. However, these taxes are less onerous than in most other Western countries.
The corporate tax rate in Sweden is 20.6%. This rate was introduced in 2021, when it was lowered from the previous slightly higher rate.
A relative attractive corporate tax rate makes up for one of the most expensive social security systems in the world. This incentives companies to invest and boost productivity, instead of having an oversized staff.
The consumption of goods and services in Sweden is subject to Value-Added Tax. VAT has 4 different rates in the Nordic country.
The general VAT rate in Sweden is 25% and applicable to all goods and services that are not subject to any of the reduced rates. There are a total of three reduced rates.
The first reduced rate of 12% applies to some foods, drinks, restaurants, hotels, bars, clothing, footwear and general repairs.
The second reduced rate of 6% is used for public transport, books and newspapers, as well as cultural and sporting events.
Finally, health services, medicines and international transport are exempt from VAT.
In summary, while the general VAT rate is high, most essential goods and services can be purchased at one of the reduced rates.
While the tax burden on earned income is very high, and companies and investors also face relatively high tax rates, Sweden does not tax inheritances or gifts at all.
Sweden scrapped its inheritance tax altogether in 2004. It is therefore one of the best countries to live in if we want to pass on our wealth to someone else.
In the same way, the gift tax was also abolished. This allows us to donate assets without triggering any tax event.
Finally, we will take a look at the state of the Swedish public finances.
A low level of public debt indicates there is budget stability and therefore no need for tax increases or major reforms.
Fortunately, Sweden ranks among the countries with the best public finances within the developed world. Their public debt is quite small. And, relative to the size of its economy, it has been getting smaller for almost three decades
The graph below shows the level of public debt in Sweden since 1995:
Most of Scandinavia suffered a severe economic crisis in the early 1990s. It affected Sweden in a very painful way, experiencing a housing bust and a banking crisis. But public finances have strengthened significantly ever since.
To conclude this analysis, we will recap the most important aspects of Swedish taxation. We can confirm it is indeed a high-tax country.
However, while it is true that Sweden has very high tax rates on labor income, taxation for capital income and corporations is in line with what we find in most other developed countries.
Additionally, Sweden treats its wealthiest citizens very well by not charging them any wealth taxes while they live, or any inheritance or gift taxes when they pass on their assets to someone else.
As a result, while it may be difficult to accumulate a significant asset base in Sweden, it is definitely simple to preserve it. This helps its corporations grow strong from a capital perspective, which in turn can boost the long term potential of the economy.
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And if you want to read about another European country that values the long-term sustainability of its finances, but with a more attractive taxation, check out this link:
Taxes in Switzerland – A Complete Guide
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