What is AM-bidrag (Arbejdsmarkedsbidrag)?

AM-bidrag (Arbejdsmarkedsbidrag — labour market contribution) is technically a flat 8% levy on employment and self-employment income, distinct from income tax but collected alongside it via the A-skat (withholding tax) system.\n\nBase: AM-bidrag applies to: employment income (løn), director's fees (bestyrelseshonorar), self-employment income (at the sole trader level, before VSO/KAO calculations), most benefits in kind, holiday pay, and termination payments. It does not apply to: passive investment income, dividends, rental income (unless it's business rental through a company), or pension payouts (these have been subject to AM-bidrag when the contributions were made).\n\nCollection: For employees, the employer withholds AM-bidrag along with A-skat and remits both to SKAT. AM-bidrag is calculated first on gross income, then A-skat is calculated on the net (gross minus AM-bidrag). For self-employed, AM-bidrag is included in the preliminary tax (forskudsopgørelse) and settled in the annual tax return.\n\nDeductibility: The 8% is deductible from gross income before calculating income tax. This makes the effective rate slightly less than it appears: a 55.9% marginal rate already accounts for AM-bidrag's deductibility.\n\nFor company directors: An ApS direktør drawing salary pays AM-bidrag on that salary. However, dividends extracted from the company do not attract AM-bidrag — only capital income tax (27%/42% on aktieindkomst). This is one reason optimal salary/dividend strategies typically involve keeping salary below the topskat threshold and taking the remainder as dividends.\n\nReduction for pension contributions: Employer pension contributions are not subject to AM-bidrag (they were subject to AM-bidrag when made in earlier years, which is why pension payouts are not). Employee contributions via salary sacrifice reduce the AM-bidrag base.\n\nHistorical context: AM-bidrag was introduced in 1994 to fund active labour market policies. The rate has been 8% since 2008. It is formally a contribution, not a tax, but functions identically to an employment tax.