The new coalition plans to shake up the income tax system by cutting the number of tax bands to two from 2019, according to broadcaster NOS.

The four parties involved in the talks – the VVD, D66, ChristenUnie and Christian Democrats – are currently looking at the financial impact of their plans, as the negotiation process draws to a close.

The change will cut the tax bill of someone earning €40,000 by €1,200 a year, but middle and high earners will benefit most, the broadcaster said. In total, the tax cuts will cost €5bn.

The new system will involve an income tax rate of 37% on earnings up to €68,000 and 49.5% for all income above that, NOS said. Currently taxpayers are charged roughly 36.55% on earnings up to €20,000, 40.8% on earnings up to €67,000 and 52% above that.

To pay for the changes, the new coalition will increase value-added tax (btw) on some items and increase energy taxes, NOS said.

There may also be changes to mortgage tax relief. Although the VVD opposes a further reduction, D66, ChristenUnie and the CDA all favour further cuts, arguing that the low interest rates will minimise the impact on home owners.