Zero Income Tax for young employees

At the beginning of July, the Polish Government passed a law exempting employed earners under the age of 26 from the obligation to pay personal income tax. According to forecasts, the new provisions will cover approx. 2 million young taxpayers. The zero income tax will come into force on August 1st, 2019.

The new legislation is part of the government’s plan of reforms, the so-called ‘Kaczyński’s Five’. The exemption from personal income tax is going to pertain to income from service relationship, employment relationship or home-based work, commission contracts concluded with a business and cooperative work relationship. In practice, it means that young employees will receive higher annual remuneration, as it will increase by the amount of personal income tax contributions they will not have to pay. The tax relief will not cover businesses, though.

What sums of income are we talking about? The exemption from personal income tax is going to apply to income up to 85,528 PLN per annum. In 2019, however, since the new law becomes effective only in August, the limit will be lower and amount to 35,636.67 PLN. If the income exceeds the limit, it will be subject to statutory taxation at the rate relevant for the second tax brackets. The income made in the first part of the year in which tax was paid by the employer is subject to normal taxation.

Example:
An employee earned 5,057.82 PLN gross per month in the course of the entire year 2019. Their annual income amounts to 60,693.84 PLN, with the income from January to July amounting to 40,462.56 PLN and from August to December – 20,231.28 PLN. In this example, the first amount will fall in the first tax brackets and the second amount – following the new legislation – is exempt from personal income tax, because it does not exceed the limit. In 2020, on the other hand, if the annual income of an employee under 26 is similar, it will be entirely exempt from taxation.

Procedure for Paying Taxes in 2019 and 2020

In 2019 (from August until December), the employer of persons under 26 will not have to withhold their income tax. It ought to be noted, however, that the young employee has to submit a declaration that their income would be exempt from taxes in their entirety. Otherwise, the employer will automatically withhold tax, which will be refunded to the employee’s account only after they have submitted their annual tax declaration for 2019. In this case, the employer’s task is to verify whether the income under the contract does not exceed the limit. If it does, the employer has to start withholding tax until the end of the calendar year.

From 2020, the limit will amount to the 82,528 PLN and the tax will not be withheld. However, there will be the possibility to request that tax be withheld. Similarly, as at the end of 2019, the employer will have to verify whether the employee’s earnings do not exceed the maximum limit of the first tax brackets. If they do, the young taxpayer will be obliged to submit an annual declaration concerning the amount above the limit.

Special Cases

If a part of the income is earned abroad, the tax will be calculated from the total sum of annual earnings, i.e. foreign and domestic income together.

Example:
A person is employed abroad and works under a commission contract in Poland at the same time. His foreign income amounts to 30,000 PLN, domestic to 50,000 PLN, which in total amounts to 80,000 PLN gross per year. In this example, both sources of income are treated equally. As a result, the young taxpayer does not have to submit an annual declaration, as they are entitled to zero income tax.

The relief covers exclusively income in the form of remuneration. What remains unchanged is the taxation of:

• sickness benefits,
• maternity allowances,
• rehabilitation benefits,
• unemployment benefits,
• severance pays,
• scholarships,
• certain maintenance payments.

It ought to be noted that the eligibility for the relief depends on the employee’s exact birthdate. Thus, if they turn 26 in October, 2019, they are entitled to exemption from personal income tax only from August 1st until their October birthday in the same year. Again, the employer will withhold tax for the remaining time until the end of the year.