Key assumptions
According to the new amendment to the Personal Income Tax Act, which was introduced on 1 August 2019, income earned by the individuals under age 26 is exempt from personal income tax. The exemption will be limited and may apply to revenues not exceeding the first threshold of the tax scale, which is PLN 85,528.
The exemption will apply to the income from employment, and mandate/freelance contracts. The exemption will not apply to the persons earning income from other titles, eg. business activity, sale of the shares, as well as income taxed with a flat rate tax.
A surplus of over PLN 85,528 will be subject to taxation on general terms, using a progressive tax scale (18% and 32%).
Detailed regulations
Calculation of exempt income has been regulated in detail in the Amending Act. There are no tax deductible costs applicable to the exempted income (neither standard, nor increased, actually incurred, or 50% connected with the transfer of copyrights). Social security and health insurance contributions are due independently of exemption application. In other words, the exemption only applies to tax, while social and health insurance contributions will continue to be discharged in full.
It is also worth mentioning that certain categories of persons (eg students) are exempt from the obligation to pay ZUS contributions for certain types of contracts (e.g. mandate/freelance).
Regarding the health insurance contribution, the legislator, in case of exemption, provided for a rather complicated way of calculating it. In order to calculate the contribution, it will be necessary to calculate a hypothetical tax advance (including also exempted income) and to verify if the health insurance contribution is higher or not from such calculated tax advance. Also, calculating the social security and health insurance contributions which may be deducted from taxable income or from tax, may be quite complex and requires special attention of the tax remitters and taxpayers.
Collection of tax advances
According to the general rule if the taxpayer receives exempted income, the remitter does not withhold tax advances. The taxpayer, however, may file a statement requesting the tax remitter to withhold the tax advances. In this case, in the annual tax reconciliation, the taxpayer will be entitled to the tax refund or will decrease additional payment tax (if employed, for example, by several remitters). This regulation will be applied from January 1, 2020.
Special rules in force in 2019
Specific regulations were introduced regarding income received by persons covered by the exemption in 2019. The exemption applies to the income received starting from the 1st of August and are limited proportionally to PLN 35,636.67. As a rule the tax remitter is obliged to withhold tax advances (the taxpayer will settle the tax overpayment in the annual tax return). However, the taxpayer may provide a tax remitter with a statement according to which his/her income received in the period of August 1 - December 31, 2019 will not exceed the exemption limit. In such a case, the tax remitter should stop withholding monthly tax advances.
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