Polish Deal - tax changes for employees

From 1 January 2022, the package of tax changes introduced under the Polish Deal will enter into force in Poland. On 16 November 2021 the act introducing the new regulations was signed by the President of Poland, and a week later, on 23 November, the act was published in the Journal of Laws.
Author:
Beata Bar
Payroll Manager

Undoubtedly, it is no easy task to orient oneself among the thicket of new regulations. Many employees are already wondering what net pay they will receive in January 2022. Especially for you, we have compiled information presenting the key tax solutions provided for in the Polish Deal, and we have also prepared sample pay calculations showing who will gain from the Polish Deal, at what income levels, who will lose, and those for whom the changes will have a neutral impact.

Key tax changes introduced by the Polish Deal from 1 January 2022 affecting employees’ pay:

  1. Raising the ceiling from PLN 85,525 to PLN 120,000 on which the advance on income tax will be 17%. This means that the 32% income tax rate will kick in only when income exceeds PLN 120,000.
  2. Relief for young workers—the limit of income exempt from PIT for taxpayers up to age 26 (PIT Act Art. 21(1)(148)) will remain changed, at PLN 85,528. Persons up to age 26 will thus pay income tax only after crossing this limit, and initially at the 17% rate. However, if their taxable income exceeds PLN 120,000, the 32% rate will apply.
  3. Increase in the tax-exempt amount from PLN 8,000 to PLN 30,000 annually, which will affect the amount reducing the tax. The amount reducing the tax will also be available to taxpayers in the second tax bracket. Currently, taxpayers at the 32% bracket have not been entitled to a tax-free amount. Currently the monthly tax relief is PLN 43.76 (i.e. 1/12 of PLN 525.12), but after the changes it will be PLN 425.00 (based on the calculation PLN 30,000 × 17% = PLN 5,100/12 = PLN 425.00).

To claim the monthly deductions of the tax-free amount in calculating the worker’s pay, the employee should complete a PIT-2 statement and submit it to the employer.

  1. Increase of the amount of revenue subject to 50% revenue-earning costs for copyright and related rights and disposal of such rights (applicable to employees who are creators, artists or performers). Currently the 50% costs (on the bases referred to in PIT Act Art. 22(9)(1)–(3)) cannot exceed PLN 85,525 in the tax year. In 2022 this total will increase to PLN 120,000.
  2. Introduction of “middle-class relief,” which will be reflected in calculating income-tax advances. This relief is provided for employees earning revenue from PLN 5,701 to 11,141 per month, i.e. PLN 68,412 to 133,692 per year, taxed under the tax scale.

This relief applies only to employees working under an employment contract or persons operating a business and paying income tax under general rules (i.e. according to the tax scale).

Middle-class relief will also be available to creative employees earning revenue subject to 50% revenue-earning costs, on the condition that they are persons actually performing duties under an employment relationship.

Employees earning income abroad (from a foreign employer) will also be eligible for middle-class relief if they pay PIT advances themselves in Poland. They will deduct the relief for months in which their income from foreign employment falls between PLN 5,701 and 11,141.

This relief will not apply to persons performing work under a contract of mandate or contract for a specific work. Nor will it be available to business operators paying PIT at the flat rate of 19%, persons performing personal services, taxpayers paying PIT based on a flat rate on recorded revenue, or under the tax card, or recipients of retirement or disability pensions.

As part of the new middle-class relief, within the range referred to above, taxpayers are divided into two narrower groups:

  • Persons earning revenue from PLN 5,701.00 to 8,549.00 per month 
  • Persons earning from PLN 8,549.01 to 11,141.00 per month.

The difference between these two groups will consist in the manner of calculation of the relief. For the lower income range, the relief will be calculated using the formula:

(income × 6.68% ˗ PLN 380.50)/0.17

And for the higher income range:

(income × (˗7.35%) + PLN 819.08)/0.17

In the case of spouses settling income tax jointly for the whole year, each of them will be able to deduct the middle-class relief only up to half of the sum of the total income earned by the spouses during the tax year, calculated according to the statutory formula.

Middle-class relief applies only within the range of annual income from PLN 68,412 to 133,692. This means that if the taxpayer exceeds this ceiling in a given year, even by a single zloty, the taxpayer will lose the right to middle-class relief. This will lead to a highly unfavourable situation for the employee. If the employee claims the middle-class relief in the monthly settlement of pay, but it turns out in the annual tax return that the employee exceeded the allowable limit, the taxpayer will have to refund the relief, and will be forced to pay a large shortfall in tax along with the annual PIT return.

Therefore, employees should carefully examine their anticipated annual income. This should reflect not only monthly salary, but also additional taxable income, such as various types of supplements, overtime pay, bonuses, cash equivalents for unused holiday, in-kind benefits (healthcare or athletic subscriptions) and the like. Based on this analysis, the taxpayer should decide whether to claim the middle-class relief in monthly settlements, or not.

The remitter of PIT advances (i.e. the employer) will not be required to apply the middle-class relief only if the employee requests the employer not to reduce the employee’s net income (PIT Act Art. 32(2b)). Waiver of middle-class relief may be a good solution if the taxpayer can predict that the final annual income from work will exceed PLN 133,692, or does not wish to risk crossing that line. If the final settlement shows that the employee nonetheless is entitled to middle-class relief, the taxpayer can recover the unclaimed relief along with his or her annual PIT return.

But if the employee fails to request that the employer not reduce the employee’s net income to reflect the middle-class relief, the employer will have no option but will have to factor in the relief in any month in which the employee’s income from employment (including supplements and other taxable benefits) falls within the statutory range of PLN 5,701–11,141.

  1. Increase of the annual basis for calculating retirement and disability pension insurance from PLN 157,770 to PLN 177,660. Above that amount, the employer and employee will cease to pay additional retirement and disability pension contributions.
  2. The inability to deduct a portion of the health insurance contribution (7.75%) from income tax, meaning that employees will effectively pay their full health insurance contribution of 9%, and not 1.25% as is currently the case.
  1. Introduction of a new rule requiring payment of health insurance contributions for:
  • Management board members and commercial proxies, who will pay a 9% health insurance contribution (before, this group was excluded from paying health insurance contributions). Persons serving pursuant to an act of appointment and receiving compensation accordingly will be subject to health insurance. The obligation to pay the 9% health insurance contribution will arise upon appointment and cease upon removal from office, and the party paying the person’s compensation will be required to register the individual for health insurance coverage. In other words, the entity appointing a commercial proxy or management board member and paying his or her compensation will be the remitter—in the case of a commercial proxy, only of the health insurance contribution, and in the case of a management board member, as in previous years, of advances against PIT and also, from 2022, health insurance contributions.
  • Business operators, i.e. individuals running economic activity:
    • Taxed under general rules will pay 9%
    • Taxed at the flat rate will pay 4.9%
    • Taxed at the flat rate on recorded revenue will pay contributions based on 60% to 180% of the average wage (depending on the amount of income)
    • Taxed under the tax card will pay 9% of the minimum wage.
  1. New tax relief for income up to PLN 85,528 is introduced for:
  • Parents exercising parental authority over at least four children. This relief will apply separately to each of the parents. Based on this new tax relief, a parent of four children earning gross income from work each month of up to about PLN 9,600 will not pay income tax.
  • Persons returning from abroad for four successive years after the year of the move. This regulation is designed to encourage Poles to return home, but also to encourage foreigners to change their tax residence to Poland. The exemption from tax on income tax on an amount not exceeding PLN 85,528 during the tax year will be available to any taxpayer who transfers their place of residence to Polish territory. The relief for persons returning from abroad will be available in four consecutive years following the tax year, counting from the start of the year, in which the taxpayer moved their residence, or from the start of the following year.
  • Working seniors, who despite reaching age 60 (for women) or 65 (for men) decide, instead of claiming a retirement pension, family disability, or benefits for the uniformed services or judges, to continue working, performing contracts of mandate, or operating a business. Only income that is a basis for social insurance will be subject to tax relief. The tax exemption for professionally active persons of retirement age not collecting retirement pensions (within the limit of PLN 85,528) will apply only to income earned from an official relationship, an employment relationship, cottage industry (piecework), cooperative employment, under contracts of mandate referred to in PIT Act Art. 13(8), and from non-agricultural economic activity. Income earned under a managerial contract or copyright agreement will not benefit from this tax relief.

The workers listed above will not pay tax on annual income up to PLN 85,528. Adding in the increased tax-free exemption of PLN 30,000, in the case of persons settling under the tax scale this relief will cover a total income of PLN 115,528 per year.

In the case of parents of four or more children filing jointly, the total exclusion will be PLN 231,056 per year. Such parents will not pay income tax until they cross the limit of PLN 231,056, and then the 17% rate will apply, and the 32% rate will apply from the point where their taxable income exceeds PLN 120,000.

If the taxpayer is eligible for exemption on more than one basis, the total tax-free amount for all such income cannot exceed PLN 85,528 (plus the tax-free amount up to PLN 30,000 for taxpayers settling under the tax scale).

When analysing the new regulations for persons from the foregoing social groups, who from January 2022 will be covered by a tax exemption, many doubts arose surrounding the proper calculation of the amount of the health insurance contributions for those taxpayers. A gap in the regulations was discovered in this respect. Thus these provisions were clarified in the final parliamentary amendment to the bill on 17 November 2021. Consequently, with respect to these persons, the same rule for calculation of the health insurance contribution will apply as in the case of persons up to age 26 exempt from income tax under PIT Act Art. 21(1)(148). This refers to a special provision, Art. 83(2a) of the Healthcare Act. It provides for calculation of the health insurance contribution up to the amount of the hypothetical PIT advance. This provision states that “if the contribution for health insurance calculated on income exempt from income tax under Art. 21(1)(148) of [the PIT Act] is higher than the advance against personal income tax which the remitter would calculate if the income of the insured were not exempt from income tax under that provision, the contribution calculated for specific months shall be reduced to the amount of such advance.”

  1. Introduction of a new sanction against illegal hiring and payment “under the table.” Contributions for retirement, disability and sickness insurance on such salary will be chargeable solely against the employer, also in the portion subject to financing by the insured (the employee). They will also be excluded from the employer’s revenue-earning costs. There is a risk that these regulations will be interpreted broadly. The tax authorities may seek to include in this category not only instances where the employer never confirmed the terms of employment in writing, but also where a written contract of another type was concluded, e.g. a contract of mandate or B2B contract, when the terms of cooperation demonstrate that there is actually an employment relationship between the parties. With an eye to the risk of broad application of these new rules, taxpayers should now consider verifying all contracts of mandate or B2B contracts they use in self-employment situations which might create an impression that in reality they are employment contracts or de facto establish an employment relationship.

We have prepared sample pay calculations for 2021 and 2022, to depict calculations of workers’ pay according to the new regulations and help estimate who will gain under the Polish Order, and at what levels of income, who will lose, and for whom the changes will have a neutral effect.

Analysis of income at which employees gain from the Polish Deal, and income from which they begin to lose on the Polish Deal

Assumptions: An employee under an employment contract, earning the monthly pay indicated in the table, with revenue-earning costs of PLN 250 per month, settling income tax individually, not claiming relief for children, and not participating in an employment capital plan (PPK).

Monthly gross pay

Gain/(loss) in 2022 compared to 2021

Monthly

Annually

Comments

               3,010.00 

154.00 

1,848.00 

 

               4,000.00 

 114.00 

1,368.00 

 

               5,000.00 

 47.00 

564.00 

 

               5,701.00 

-

-

Middle-class tax relief

               7,000.00 

Middle-class tax relief

               8,000.00 

-   

Middle-class tax relief

               8,916.00 

(-52.00) 

(-10.00) 

Middle-class tax relief. Smaller loss annually than monthly (*)

             10,000.00 

(-203.00) 

(-95.00) 

Middle-class tax relief. Smaller loss annually than monthly (*)

             11,141.00 

(-364.00) 

(-211.00) 

Middle-class tax relief. Smaller loss annually than monthly (*)

             11,350.00 

(-377.00) 

  -   

Smaller loss annually than monthly (*)

             11,400.00 

(-381.00) 

28.00 

Smaller loss annually than monthly (*)

             12,000.00 

(-421.00) 

292.00 

Smaller loss annually than monthly (*)

             12,300.00 

(-441.00) 

53.00 

Smaller loss annually than monthly (*)

             12,360.00 

(-446.00) 

(-6.00) 

Smaller loss annually than monthly (*)

             13,000.00 

(-489.00) 

(-477.00) 

Smaller loss annually than monthly (*)

             14,000.00 

(-555.00) 

(-1,357.00) 

Smaller loss annually than monthly (*)

             15,000.00 

(-622.00) 

(-2,225.00) 

Smaller loss annually than monthly (*)

             18,000.00 

(-823.00) 

(-4,905.00) 

Smaller loss annually than monthly (*)

             20,000.00 

(-956.00) 

(-6,713.00) 

Smaller loss annually than monthly (*)

(*) as a result of the higher tax threshold and tax-free amount in 2022 compared to 2021

Example 1. Calculation of the pay of an employee who is not entitled to middle-class tax relief or has waived middle-class tax relief

Assumptions: An employee under an employment contract, earning the monthly pay indicated in the table, with revenue-earning costs of PLN 250 per month, settling income tax individually, not claiming relief for children, and not participating in an employment capital plan (PPK).


Elements

Formula for calculation

 2021 

 2022 

1.

Monthly gross pay 

 

          3,010.00 

          3,010.00 

2.

Retirement pension insurance contribution

Item 1 × 9.76%

              293.78 

              293.78 

3.

Disability pension insurance contribution

Item 1 × 1.5%

                45.15 

                45.15 

4.

Sickness insurance contribution

Item 1 × 2.45%

                73.75 

                73.75 

5.

Employee’s total social insurance (ZUS) contributions

Item 2 + item 3 + item 4

             412.67 

             412.67 

6.

Basis for health insurance contribution

Item 1 – item 5

          2,597.33 

          2,597.33 

7.

Health insurance contribution (9%)

Item 6 × 9%

             233.76 

             233.76 

8.

Portion of health insurance contribution to be deducted from income tax (7.75%)

Item 6 × 7.75%

              201.29 

 eliminated 

9.

Revenue-earning costs (PLN 250 or 300)

 

              250.00 

              250.00 

10.

Middle-class tax relief (not eligible)

 

 N/A 

                      -   

11.

Net income for taxation

Item 1 – item 5 – item 9 (result rounded to a whole zloty)

          2,347.00 

          2,347.00 

12.

Tax relief (tax-free amount)

 

                43.76 

              425.00 

13.

Income tax advance before rounding

(item 11 × 17%) – item 12

              355.23 

 (- 26.01) 

14.

Income tax advance 

Item 13 – item 8 (result rounded to a whole zloty)

             154.00 

                      -   

15.

Net pay

Item 1 – item 5     – item 7 – item 14

          2,209.57 

          2,363.57 

16.

Increase/(decline) in net income 

 

 

             154.00 

Example 2. Calculation of the pay of an employee who is entitled to middle-class tax relief in the 1st group of income range, i.e. earns income of PLN 5,701.00 to 8,549.00 per month

Assumptions: An employee under an employment contract, earning the monthly pay indicated in the table, with revenue-earning costs of PLN 250 per month, settling income tax individually, not claiming relief for children, and not participating in an employment capital plan (PPK).


Elements

Formula for calculation

 2021 

 2022

1.

Monthly gross pay 

 

             5,702.00 

             5,702.00 

2.

Retirement pension insurance contribution

Item 1 × 9.76%

                 556.52 

                 556.52 

3.

Disability pension insurance contribution

Item 1 × 1.5%

                   85.53 

                   85.53 

4.

Sickness insurance contribution

Item 1 × 2.45%

                 139.70 

                 139.70 

5.

Employee’s total social insurance (ZUS) contributions

Item 2 + item 3 + item 4

                 781.74 

                 781.74 

6.

Basis for health insurance contribution

Item 1 – item 5

              4,920.26 

              4,920.26 

7.

Health insurance contribution (9%)

Item 6 × 9%

                 442.82 

                 442.82 

8.

Portion of health insurance contribution to be deducted from income tax (7.75%)

Item 6 × 7.75%

                 381.32 

 eliminated 

9.

Revenue-earning costs (PLN 250 or 300)

 

                 250.00 

                 250.00 

10.

Middle-class tax relief (income from PLN 5,701.00 to 8,549.00 monthly)

(Income x 6.68% - PLN 380.50)/0.17

 N/A 

                     2.32 

11.

Net income for taxation

Item 1 – item 5 – item 9 – item 10 (result rounded to a whole zloty)

              4,670.00 

              4,668.00 

12.

Tax relief (tax-free amount)

 

                   43.76 

                 425.00 

13.

Income tax advance before rounding

(item 11 × 17%) – item 12

                 750.14 

                 368.56 

14.

Income tax advance 

Item 13 – item 8 (result rounded to a whole zloty)

                 369.00 

                 369.00 

15.

Net pay

Item 1 – item 5     – item 7 – item 14

             4,108.43 

             4,108.43 

16.

Increase/(decline) in net income 

 

 

                       0   

Example 3. Calculation of pay of an employee who is entitled to middle-class tax relief in the 2nd group of income range, i.e. earns income of PLN 8,549.01 to 11,141.00 per month

Assumptions: An employee under an employment contract, earning the monthly pay indicated in the table, with revenue-earning costs of PLN 250 per month, settling income tax individually, not claiming relief for children, and not participating in an employment capital plan (PPK).


Elements

Formula for calculation

2021

2022

1.

Monthly gross pay 

 

           10,000.00 

           10,000.00 

2.

Retirement pension insurance contribution

Item 1 × 9.76%

                976.00 

                976.00 

3.

Disability pension insurance contribution

Item 1 × 1.5%

                150.00 

                150.00 

4.

Sickness insurance contribution

Item 1 × 2.45%

                245.00 

                245.00 

5.

Employee’s total social insurance (ZUS) contributions

Item 2 + item 3 + item 4

             1,371.00 

             1,371.00 

6.

Basis for health insurance contribution

Item 1 – item 5

             8,629.00 

             8,629.00 

7.

Health insurance contribution (9%)

Item 6 × 9%

                776.61 

                776.61 

8.

Portion of health insurance contribution to be deducted from income tax (7.75%)

Item 6 × 7.75%

                668.75 

 eliminated 

9.

Revenue-earning costs (PLN 250 or 300)

 

                250.00 

                250.00 

10.

Middle-class tax relief (income from PLN 8,549.01 to 11,141.00 monthly)

(Income x (-7.35%) + PLN 819.08)/0.17

N/A 

                494.59 

11.

Net income for taxation

Item 1 – item 5 – item 9 – item 10 (result rounded to a whole zloty)

             8,379.00 

             7,884.00 

12.

Tax relief (tax-free amount)

 

                   43.76 

                425.00 

13.

Income tax advance before rounding

(item 11 × 17%) – item 12

             1,380.67 

                915.28 

14.

Income tax advance 

Item 13 – item 8 (result rounded to a whole zloty)

                712.00 

                915.00 

15.

Net pay

Item 1 – item 5     – item 7 – item 14

             7,140.39 

             6,937.39 

16.

Increase/(decline) in net income

 

 

(- 203.00) 

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