Source Tax Switzerland (Quellensteuer): When Skipping Tax Declarations Might Save You Money

Navigating the Swiss tax system can be a daunting task for foreigners, especially when deciding between source tax (Quellensteuer) and a regular tax declaration. While source tax (Quellensteuer) in Switzerland is automatically deducted from your paycheck and covers all income taxes, filing a regular tax declaration allows for potential deductions.

In this article, we’ll dive into the pros and cons of each tax strategy and how to calculate the best option for your specific situation. You’ll also learn about real-life examples so you can best understand the potential financial impact of both taxations. Whether you’re new to Switzerland or have been here for a while, understanding these tax strategies can help you make informed decisions and potentially save you a significant amount of money. Let’s explore how you can optimize your tax situation and secure your financial future in Switzerland!

Table of contents

• Taxes for foreigners in Switzerland: Introduction to Source Tax (Quellensteuer)
• Pro’s and Con’s of filling out your tax declaration in Switzerland
• How to calculate what tax strategy best for you
• Conclusion & recommendations

Taxes for foreigners in Switzerland: Introduction to Source Tax (Quellensteuer)

Maybe you are considering a move to Switzerland, have just moved or have been in Switzerland for a while. The Swiss tax system allows foreigners, that don’t have an “Ausweis C” or aren’t married to a Swiss citizen, to either be taxed through source tax (Quellensteuer) or alternatively, through a regular tax declaration, if certain thresholds aren’t exceeded.

You need to file a tax declaration if:

• you earn more than CHF 120’000 per year,
• you own assets worth more than CHF 100’000.- and generate a cash flow of more than CHF 2’000.- per year from those assets, 
• you have an “Ausweis C” = C permit,
• are married to a Swiss resident.

Should none of these apply to you, you are free to decide, if you want to file your taxes or simply be taxed at source. 

Important: Once you fill out a regular tax declaration, there is NO WAY BACK to not filing your taxes thus source tax (and yes, even if source taxes would be lower - doors have closed my friend). Do your calculations before deciding on one or the other! I’ll show you how in a little bit.

The source tax is deducted automatically from your paycheck and covers all federal, cantonal and communal income taxes. An additional tax declaration at the end of the year is not necessary. The percentage of source tax depends on the canton you live in.

Pro’s and Con’s of filling out your tax declaration in Switzerland

To help you decide what tax filing system is best for you, I’ve created a short overview of the main advantages and disadvantages:

How to calculate what tax strategy best for you

I would highly recommend calculating both tax strategies for your individual situation so you can make the best decision for you. I know I’m repeating myself, but: Once you leave the source tax system, there’s no going back. This is one of those type A decisions, that you can’t revert. So do your homework first and don’t regret your decision later.

Here’s how you can conduct your own personal calculation:

1. Use one of the online calculators like this one to calculate the regular taxation on your income, with regards to your personal situation and canton.
2. In comparison, calculate your source tax with this online tool.
3. If you are not yet paying into the 3a pillar, re-do the calculation for the regular taxation and pretend to have contributed the maximum 3a amount of CHF 7’258.- Thus deduce from your taxable income (quick way: income - 3a contribution = new taxable income). How is the tax situation now? Is it still higher than your source tax?
4. Repeat this exercise for other tax deductions like educational expenses or your commute. 
5. Look at the numbers: How much taxes are you saving by NOT filing your taxes?
6. Draw your conclusion.

Let’s look at some real-life examples to make the point even clearer:

Example 1

A client reached out to me that works in Switzerland since 01.02.2021. She has a B permit. Therefore, she is taxed at source. She pays into the 3a pillar. Since she didn’t hit the threshold of CHF 120’000.- before 2023, she made her first tax declaration in 2024 for the year 2023 (no tax declaration for the years 2021 and 2022). She thought it would be possible to make a declaration retroactively for the years 2022 and 2021. Unfortunately, in Switzerland it is only possible for the precedent year – not multiple years back.

That means:

• With a B permit under CHF 120’000.- per year in earnings, she doesn’t have to file a tax declaration.
• As she’s been paying into the 3a pillar since 2021, but only filed her taxes for the first time in 2023, she can only claim the 3a benefits for the year 2023.
• She lost the tax advantages of the 3a pillar for the years 2021 and 2022.
• Depending on her canton, I would have recommended her to stay within the source tax and not pay into the 3a pillar, if the regular taxation is higher for her. Instead, she could have invested the money in “free investments” - for example ETFs. That way she would have been able to access the money anytime. In a 3a, she’s not able to retrieve it without a “3a withdrawal reason”. 

Example 2

A single Zurich resident with annual gross income of CHF 108’000.- is wondering whether a 3a pillar makes sense for her.

Let’s look at the calculations:

• Her anticipated tax burden is CHF 15’118.- with a regular tax declaration (assuming no 3a pillar payments).
• With 3a pillar payments of CHF 7’258.-, the tax burden is reduced to around CHF 13’000.- per year.
• Her source tax would be CHF 11’243.- per year.

That means:

• Even with deducting her 3a pillar payments, she would still pay CHF 1’800.- more in taxes per year if she would file a tax declaration. That is cash in her pocket!
• For now, and until she reaches CHF 120’000.- in yearly income, I wouldn’t recommend her paying into the 3a pillar, but invest her money in ETFs instead to build wealth for her retirement.

Example 3

Earning above 120k - always makes sense as you’re having to file a tax declaire anyway.

Want to discuss your personal situation with me and get an expert opinion? Book an introductory call with me here!

Conclusion & recommendations

Depending on which canton you live in, the differences in your tax burden between source tax and regular tax might be drastic. In that case, I don’t recommend you contributing to the 3a pillar as you can’t make use of the tax advantages. 

Instead, you should instead invest a monthly amount via robo advisors into ETFs, so you have an automatic system set up that allows you to grow your money step by step. If you are unsure which robo advisor is best for you, check out my overview here.

If you are filing your taxes “traditionally”, then the 3a pillar always makes sense. However, make sure to have your “fuck-off fund” of 2 to 3 months net salary ready and parked in a separate account, before starting 3a investments. This gives you the opportunity to react to unforeseen events such as losing your job or having to separate from your partner.