Reform of the tax system in Poland – summary of changes.

The Polish Deal is becoming a reality. The act amending a number of tax laws and introducing the most significant tax reform in recent times was signed by the President today (16 November 2021). This means that as of 1 January 2022, there will be significant changes in Poland to the rules governing the taxation and social security contributions on the remuneration of employees (regardless of the legal basis for their employment), including the self-employed. What will these changes involve?

Revolution in health insurance contributions

The most significant change will be the exclusion of the possibility of deducting part of the health insurance contribution from income tax. Until now, most of this amount was subject to such a deduction, and effectively only 1.25 pp of the 9% base reduced the remuneration of an employee or contractor to be paid. From the beginning of next year, this deduction will no longer be possible, which will significantly increase the tax burden on remuneration.

In addition, self-employed persons will pay health insurance contributions on their income, not on the declared amount, as has been the case to date (not less than 60% of the average monthly remuneration in the enterprise sector). An exception will be made for persons paying lump-sum tax. In their case, the basis for calculating the health insurance contribution will remain the amount dependent on the average monthly salary in the enterprise sector, ranging from 60% to 180% of this amount, depending on the income earned by the self-employed person.

In the case of persons conducting business activity who settle income tax on a linear basis, the health insurance contribution will be reduced to 4.9% of income, but not less than 9% of the minimum wage applicable at the time.

The health insurance contribution will also apply to the remuneration of company board members paid on the basis of a resolution. Until now, these amounts have been exempt from contributions.

Tax-free allowance and higher tax threshold

The increase in the health insurance contribution burden on remuneration will be partially offset by a higher tax-free allowance. Currently, the tax-free allowance is PLN 8,000 per annum. From 2022, it will be increased to PLN 30,000.

It should be noted, however, that the tax-free amount will only apply to persons who settle their income tax according to the tax scale. These persons will additionally benefit from an increase in the tax threshold from approximately PLN 85,000 currently to PLN 120,000 starting from the new year. However, these changes will not apply to self-employed persons who have opted to pay a flat-rate income tax.

New tax relief

In addition, in order to partially offset the fiscal burden, the legislator has decided to grant additional tax relief to persons earning between PLN 68,412 and PLN 133,692 per annum (the so-called middle-class relief). The relief will be available to persons employed under an employment contract and those running a business. However, it will not apply to contractors.

For the first four years, the income of persons returning to Poland or transferring their tax residence to Poland will be exempt from taxation up to PLN 85,528. The income of persons raising at least four children (their own or adopted) will also be exempt from taxation up to the same amount.

Preferences for the IT and medical industries

Individuals running a business providing services in the IT industry and practising medical professions will be able to benefit from a reduced flat-rate tax (if they choose this form of taxation). A flat-rate tax is a tax on income, without the possibility of deducting costs related to running a business. Until now, the flat-rate tax rates for these industries were as follows: 15% for the IT industry and 17% for the medical industry. From the new year, they will be 12% and 14% respectively.

Car lump sum

The rules for calculating the car lump sum added to employees' income when they use a company car for private purposes will also change. Until now, it was PLN 250 or PLN 400, depending on the engine capacity. Under the Polish Deal, the amounts added will remain unchanged. However, starting in 2022, PLN 250 will only be added to income in the case of electric cars or cars with an engine power of 60 kW or more. In all other cases, PLN 400 will be added to the remuneration. This change may particularly affect sales representatives, for whom the possibility of using a company car for private purposes is often an additional benefit associated with their position.

Effects of the legislation

For a significant percentage of people in gainful employment, the introduction of the Polish Deal will result in a reduction in their take-home pay. The new solutions may prove beneficial for people earning less than PLN 6,000 gross per month. From 2022, the remuneration payable to people earning more than PLN 13,000 gross per month will be lower than before. This is therefore likely to affect highly qualified people and company management.

The effects of the changes will be felt most by the self-employed. In their case, the Polish Deal represents a revolution in the payment of health insurance contributions and a significant increase in the burden in this respect.

Companies should therefore prepare for potentially greater than usual pressure for pay rises, particularly in the context of steadily rising inflation in Poland.