The SME profit exemption explained: 12.70% of your profit tax free
Written by Ilias Aarrass6 min read · Published on · Last reviewed on 
In short
In 2026 the SME profit exemption leaves 12.70 percent of your profit after entrepreneur's deductions untaxed; you need not apply for it and the 1,225 hour criterion does not apply.
- The order matters: first the entrepreneur's deductions, such as the € 1,200 self-employed deduction, then the exemption on what remains.
- With a loss it works the other way: 12.70 percent of your loss does not count in your return.
- Because of the rate adjustment the exemption yields at most 37.56 percent, even if your profit falls in the top bracket.
- A private limited company has no such exemption, not even on your salary as director and major shareholder.
Of all the tax schemes for freelancers, the SME profit exemption may well be the most underrated. You do not have to apply for it, track hours for it or make an investment: the tax return software applies it automatically. Yet many entrepreneurs do not know exactly how it works, why their taxable profit is lower than their profit minus the self-employed deduction, or what happens in a loss-making year. This article explains what the exemption is, in which order it is applied, who it is for and what it really saves you, with a worked example.
What the SME profit exemption is
The SME profit exemption exempts 12.70 percent of your profit, calculated on what remains after the entrepreneur's deductions. You pay no income tax on that share. It is not a deduction you claim yourself, but a fixed percentage calculated automatically in your return. The percentage has been reduced step by step in recent years, so for a future year always use the percentage that applies to that year.
The exemption applies to everyone who counts as an entrepreneur for income tax: the sole trader, but also partners in a general or professional partnership. If you earn income from a side activity the tax authorities do not see as a business, it does not apply, see from side income to a business. A private limited company has no such exemption either; that is one of the differences that counts in sole trader or company.
The order: entrepreneur's deductions first, then the exemption
The order determines the amount on which you calculate the 12.70 percent. You start with your business profit, meaning your turnover minus your costs, depreciation and any investment deduction. From that the entrepreneur's deductions come off first: the self-employed deduction of € 1,200, possibly the starter's deduction of € 2,123 and other entrepreneur's deductions such as the partner's cooperation deduction. Only then is the exemption taken from what remains.
The result is your taxable business profit. In box 1 it is added to your other income, and the brackets of 35.75, 37.56 and 49.50 percent apply, followed by the tax credits. The full picture is set out in income tax box 1 for freelancers.
Worked example: Sander with € 50,000 profit
- Business profit
- € 50,000
- Minus self-employed deduction
- € 1,200, leaving € 48,800
- SME profit exemption 12.70% of € 48,800
- € 6,197.60
- Taxable business profit
- € 42,602.40
- Saving from the exemption at 37.56%
- around € 2,328
Result: The exemption saves Sander over € 2,300 in income tax without him having to do anything. On top of that, a lower income can make his tax credits and his health insurance contribution slightly more favourable.
No hours criterion required
For the self-employed deduction and the starter's deduction you must spend at least 1,225 hours a year on your business, see self-employed deduction and hours criterion. That requirement does not apply to the SME profit exemption. If you work part-time as a freelancer alongside employment and do not reach the hours, you still get the exemption, over your full profit.
You do have to be an entrepreneur in the eyes of the tax authorities. They look at independence, the number of clients, your investments and whether you can expect a profit, among other things. If you are an entrepreneur, you get the exemption; if not, it lapses together with the other entrepreneur's facilities.
| Scheme | 1,225 hours required? | Amount or percentage |
|---|---|---|
| Self-employed deduction | Yes | € 1,200 |
| Starter's deduction | Yes, plus the starter conditions | € 2,123 |
| SME profit exemption | No | 12.70% of profit after entrepreneur's deductions |
| Small-scale investment deduction | No | 28% on investments between € 2,901 and € 71,683 |
With a loss the exemption also applies, but the other way round
The exemption is a percentage of your result, and that works in both directions. If you make a loss, the exemption reduces that loss by 12.70 percent. Suppose Daan makes a € 8,000 loss in his second year and does not meet the hours criterion, so there are no entrepreneur's deductions. The exemption takes € 1,016 off, leaving a loss of € 6,984 in his return instead of € 8,000.
That is not an error in your return but the logical flip side: in profitable years 12.70 percent is tax free, in loss-making years 12.70 percent of the loss does not count. How to offset the remaining loss against earlier or later years is explained in offsetting losses as a freelancer.
What the exemption really saves you
Because 12.70 percent stays tax free, you effectively pay less than the bracket rate on every extra euro of profit. If your profit falls in the second bracket of 37.56 percent, you pay about 32.8 cent per euro after the exemption. A lower taxable profit also feeds through into your assessment income, which can be favourable for benefits, and into the income-related health insurance contribution.
In the top bracket the exemption brings less than you might think. Because of the so-called rate adjustment, the benefit of the entrepreneur's deductions and the SME profit exemption is calculated there at 37.56 percent in 2026, the second bracket rate. So on that share you do not save 49.50 percent, but 37.56 percent.
Frequently asked questions
Do I have to apply for the SME profit exemption?
No. The exemption is calculated automatically in your return once you enter business profit. Just check that your profit is in the right section.
Do I get the exemption without 1,225 hours?
Yes. The hours criterion only applies to the self-employed and starter's deductions. For the SME profit exemption it is enough to be an entrepreneur for income tax.
Does the exemption apply in my company?
No. A private limited company pays corporate income tax and has no SME profit exemption. You do not get it on your salary as director-major shareholder either.
Why is my loss smaller in the return than in my accounts?
Because the SME profit exemption is also calculated on a loss. 12.70 percent of a loss does not count, just as 12.70 percent stays tax free in a profitable year.
Sources
- SME profit exemption 2026Belastingdienst · belastingdienst.nl
- Self-employed and starter's deduction 2026Belastingdienst · belastingdienst.nl
Sources checked on
This article provides general information based on the rules known for 2026 and does not replace personal tax advice. For your specific situation, we're happy to take a look with you.
