A tax reform in Poland (known as the Polish Deal) is becoming a fact. The act amending a number of tax acts was signed by the President on 16 November 2021, which completes the legislative process. It means that as of 1 January 2022, the tax system in Poland will change significantly. This will also affect taxation of individuals.

Revolution in health contributions

The most significant change will be the cancellation of deduction of part of the health contribution from income tax. Until now, the greater part of the health contribution was subject to such a deduction and effectively the salary was reduced only by 1.25% on this account. From the beginning of the coming year the salary will be reduced by 9% (paid on top of a "regular" income tax and social security contributions).

In addition, persons conducting business activity will pay health contributions on their factual income. Until now the calculation basis in case of sole traders was a fixed amount, declared by a given person (which in practice equalled the statutory minimum of 60% of the average monthly salary in Poland). This, as a rule will no longer be the case. The only exception where the fixed calculation basis will still apply will be persons paying a flat tax (podatek ryczałtowy). In their case, the basis for calculating the health contribution will remain the amount depending on the average monthly remuneration in Poland. However, the lew legislation introduces three thresholds, varying from 60% to 180% of that amount – depending on the income achieved by the given sole trader.

For self-employed persons settling income tax on a flat rate basis (podatek liniowy), the health contribution will be reduced to 4.9% of income, but not less than 9% of the minimum wage applicable at the time. In most cases, a reduction in the contribution rate will not offset an increase in the contribution basis. As a result, the fiscal burden for the individual will be higher than it is now.

The health contribution will also be deducted from the remuneration of members of a company's management board. So far, if the remuneration was paid on the basis of a resolution of a company body (e.g. its supervisory board) and not on the basis of an employment contract or a management contract it was only subject to PIT but exempt from any contributions.

Higher tax-free amount and tax threshold

The increased burden of health contributions will be partly compensated by a higher tax-free amount. Currently, the tax-free amount is PLN 8,000 per year. From 2022 it will be increased to PLN 30,000.

However, the tax-free amount will apply only to persons settling income tax according to the tax scale. These persons will additionally benefit from the increase of the tax threshold. So far, the tax threshold amounted to approximately PLN 85,000. Persons earning annually below this amount paid 17% income tax, those earning above it – 32%. From January 2022, the threshold will amount to PLN 120,000 (the percentage rates will remain unchanged).

It must be remembered, however, that the above changes will not apply to the sole traders who have chosen to pay the flat-rate income tax (podatek liniowy).

New tax reliefs

Additionally, in order to partially compensate for the fiscal burdens, the legislator decided to grant an additional tax relief to persons earning between PLN 68,412 and PLN 133,692 per year (the so-called middle class relief). The relief will be available to persons employed on the basis of an employment contract and persons conducting business activity (self-employed). It will not apply to contractors (natural persons employed under service agreements).

For the first four years, income of persons returning to Poland or transferring their tax residence to Poland will be exempt from taxation up to approx. PLN 85,000. Up to the same amount, income of persons bringing up at least four children (their own or adopted) will be exempt from taxation.

Tax preferences for IT and medical professionals

IT professionals and persons performing medical professions will be able to benefit from a reduced rate of flat tax (podatek ryczałtowy), if they choose this form of taxation. The flat tax is based on taxation of revenue, without deductibility of costs related to running the business. The tax rates for these industries have been as follows: for the IT professionals – 15%, for the medical professionals – 17%. From January 2022 they will be respectively: 12% and 14%.

Lump sum car allowance

There will also be a change in the rules for settling car lump sums to be added to employees' income when they use company cars for private purposes. Until now, it was PLN 250 or PLN 400, depending on the engine capacity. Under the new law, the addition amounts will remain unchanged. However, starting from 2022, PLN 250 will only be added to the revenue in the case of electric cars or cars with engine power of 60 kW and above. In all other cases, PLN 400 will be added to remuneration.

This change may particularly affect sales representatives, for whom the possibility to use a company car for private purposes often constitutes an additional benefit related to the position. Until now, they were usually offered cars that would fall within the PLN 250 limit.

Implications of the new legislation

For a large percentage of employees, the introduction of the new legislation will result in reduction in the net earnings. The new solutions may prove beneficial for persons earning less than PLN 6,000 gross per month. On the other hand, the net remuneration of people earning more than PLN 13,000 gross per month will be lower than it is now. This will therefore most likely affect highly qualified employees and company executives. 

The effects of the changes will be borne most heavily by the self-employed (sole traders). In their case, the new legislation introduces a revolution in the payment of health contributions and a significant increase in public burden on this account.

As a result of these changes in law, companies should prepare themselves for potentially higher than usual pressure on salary increases, in particular in the context of the ever-increasing inflation in Poland.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.