The most important changes affecting employees after the tax reform

 Published: 05.01.2018. 15.44

Sub menu

The State Revenue Service (SRS) reminds that in the course of the tax reform as of 1 January 2018 several significant changes will also affect employees. The main changes concerning employees include the significant increase of the minimum wage, the assessment of payroll taxes, in particular, personal income tax and mandatory state social insurance contributions, as well as the possibilities to obtain the personal income tax refund for the eligible expenses.

Increase of the minimum monthly wage

As of the following year, the minimum monthly wage is raised from the current EUR 380 to EUR 430.

Increase of the monthly personal allowance for pensioners

As of the following year, the non-taxable allowance of pensioners shall be increased from the current EUR 235 to EUR 250 per month, in the year 2019 - to EUR 270 per month and in the year 2020 - to EUR 300 per month.

Personal Income Tax

In the following year, most employees will have to pay a lower tax bill due to the introduction of a progressive personal income tax rate. This means that the annual income up to EUR 20 004 will be subject to 20% tax rate (replacing the previous rate of 23%), the share of income from EUR 20 004 to EUR 55 000 will be subject to 23% tax rate and only the share of income in excess of EUR 55 000 will be subject to 31.4% tax rate.

Mandatory State Social Insurance Contributions

As of the following year, the rate of mandatory social insurance contributions will be increased by 1 per cent (0.5% to be borne by the employer and 0.5% by the employee). These revenues will be directed to finance healthcare within the state budget, so that healthcare services to be funded by the state budget can be provided to the individuals who are subject to health insurance. The rate of social insurance contributions next year will amount to 35.09%, of which 24.09% will be payable by the employer and 11 % – by the employee[1].

Tax allowance

Along with increasing the minimum wage, differentiated tax-allowance for the personal income tax purposes will also be significantly increased. At the moment, it varies from EUR 60 to EUR 115 per month; yet, as of the next year it will be in the range of EUR 0 - 200 and will increase every year, i.e. in the year 2019, it will reach the range of EUR 0-230 and in the year 2020, EUR 0-250.

For salaries up to EUR 440 (before tax), the tax allowance for each year will be applied in full (EUR 200 in the year 2018, EUR 230 in the year 2019, EUR 250 in the year 2020).

For monthly incomes from EUR 440 to 1000, as of next year the tax allowance will be gradually reduced according to the formula; for monthly incomes exceeding EUR 1000 the tax allowance will not be applied at all. As of 2019, along with increasing the tax allowance, the cap on the income to which it does not apply will also be raised. Therefore, in the year 2019 tax allowance will not apply to incomes exceeding EUR 1100 per month and in the year 2020, to incomes exceeding EUR 1200 per month.

It is planned to apply the tax allowance in full immediately during the tax year (currently, low income earners can only benefit from the differentiated tax allowance in the following tax year upon filing the annual income tax return). In practice, the SRS will inform the employer (to whom the payroll tax book is submitted) about the projected tax allowance twice a year, before 1st of January and 1st of August. The SRS will assess it based on the income of the previous year and send it to the employer.

Increase of tax relief for dependants

As of the following year, the tax relief for a dependent person shall be increased from EUR 175 to EUR 200 per month, in the year 2019 - to EUR 230 per month and in the year 2020 - to EUR 250 per month. Moreover, as of 1 July 2018, each personal income tax payer will have the possibility of obtaining additional tax relief also for an unemployed spouse caring for one or several children depending on their age and whether they continue their education[2].

For example, as of 1 July 2018, it will be possible to obtain tax relief for an unemployed spouse if he or she cares for a child under the age of three.

Deductible expenses

As before, upon filing the annual income tax return, all personal income tax payers will be able to claim a partial tax refund on education and medical expenses, contributions to pension funds and other deductible expenses.

The main changes are related to the amount from which the tax refund can be claimed, however, this cap will only take effect as of the year 2019 upon submission of the tax return for the year 2018.

Namely, in the year 2019, upon submission of the annual tax return along with the receipts for deductible expenses incurred in 2018 for medical and education services and donations, including donations to political parties, the individuals will be able to claim a tax refund for the amount of deductible expenses not exceeding 50% of their taxable income but not more than EUR 600 for himself/herself and for each family member.

For example, if the employee’s annual income in the year 2018 amounts to EUR 8000 and she has incurred medical expenses for her own treatment in the amount of EUR 700, only EUR 600 are deductible in the year 2018 while the remaining EUR 100 are carried forward to the next year.

At the same time, the total amount of tax deductible contributions to private pension funds and insurance premium payments will be capped at 10% of the amount of the taxpayer’s taxable income not exceeding EUR 4000 per annum.

With regard to life insurance agreements (with accumulation of funds), eligibility conditions will also be changed, extending the period to 10 years and ensuring regularity of insurance premium payments, at the same time setting transitional rules concerning the life insurance agreements, which have been already concluded.

For example, if the employee’s annual income in the year 2018 amounts to EUR 8000 and contributions to private pension funds and insurance premium payments amount to EUR 2000, the amount of deductible expenses is EUR 800, i.e. the amount not exceeding 10% of the annual income.

However, in the year 2018, when submitting income tax returns for 2017, 2016 or 2015, the current conditions[3] will still apply.

Additional information about the effect of the tax reform on various categories of taxpayers, is available on the SRS website, in sections for private individuals[3] and entrepreneurs[3] ‘How Will the Tax Reform Affect Me?'. On the SRS website, in the section Actual/News[3], information on the free SRS seminars is provided along with presentations and video materials of the seminars already conducted. Information on the tax reform is available on the website of the Ministry of Finance[3] and on the Saeima website[3].

[1] Provided the employee is covered by all the types of the social insurance.

[2] For less than 3-year-old child; for three or more children under 18 or under 24 while continuing education provided at least one child is under seven years old; for five children under 18 or under 24 while continuing education.

[3] Information available in Latvian