Significant changes in taxation of employees in Poland

The package of amendments to the Polish tax legislation that entered into force in 2022 introduced systemic changes to taxation of employees working in Poland.

First of all, the right of taxpayers to deduct the amount of the public health insurance contributions from the tax due has been abolished. As the deductible health insurance contributions were equal to 7,75% of the gross salary after deduction of social security premiums, the repeal of the right to deduct the health contributions from income tax spells the increase of the effective tax burden.

The abolition of the right to deduct health insurance contributions from income tax is to be compensated for taxpayers by increasing the amount of tax-free income (from about PLN 3 000 to PLN 30 000 for all taxpayers, regardless of the value of their income) and the amount of the second tax band (from PLN 85 528 to PLN 120 000), on which a higher 32% income tax rate applies.

At the same time, the legislator provided for a new tax relief, the so-called relief for the middle class, the purpose of which is to protect taxpayers who earn income from employment or business activity against increasing the tax burden. The relief consists in the right to deduct from the tax base a certain amount, the value of which is dependent upon the level of the employee’s salary. However, only employees whose annual salaries range between PLN 68 412 and PLN 133 692 are entitled to the middle class relief deduction.

The consequences of the described changes depend on the level of gross remuneration earned by the employee. As a rule, employees who earn less than PLN 68 412 per year will benefit from the new legislation, mainly due to the increase of the tax-free income. For employees whose annual gross salary is between PLN 68 412 and PLN 133 692, the changes shall be tax neutral, as a result of the application of the middle-class relief. New regulations are also favorable or neutral for employees whose annual earnings range between PLN 133 700 and PLN 153 600, due to the increase of the tax-free income and the value of the second tax band. However, for employees who earn more than PLN 153 600 per year, the changes will mean the increase of tax burdens. In principle, the higher the employee earns, the higher the increase of tax obligations will be. In other words, the new system of taxation is more progressive than the previous one.