Lifting the “30-fold limit” in social insurance premium payments will change how people are employed in businesses
The fight for lifting the limit on paying retirement-pension premiums after exceeding the so-called “30-fold threshold” is still going on. Passing the amendment would significantly increase the costs for the employers and higher paid employees will be forced to spend even over half of their remuneration on taxes and premiums. As a result, some of them may switch to self-employment or choose other, less costly forms of employment.
In October this year, the Ministry for Family, Labor and Social Policy proposed an amendment to the law on the social insurance system. The purpose of that bill is to lift the limit on paying retirement and pension premiums after exceeding an amount that equals 30-times the forecasted average monthly salary in a given year. The draft of the bill approved by the parliament in November assumed that the modifications would be implemented as early as January 1st, 2018. Businesses learned about this when they already had budgets planned for next year. On December 7th, the Senate therefore introduced an amendment to the draft, shifting the date when the law comes to life to January 1st, 2018, which was later approved by the parliament on December 15th, 2017. The bill is presently awaiting the President’s signature.
The proposed changes will negatively affect budgets of companies and net salaries of the highest-earning employees. It is therefore no wonder that more and more representatives of the employers and unions are calling the President to veto the bill in its entirety. Such a call had already been put forward by the Lewiatan Confederation and NSZZ “Solidarnosc”. Even though the amendment draft is already at an advanced stage of the legislative process, it is still likely that it will change further.
The limit was created to prevent huge discrepancies between retirement pension sizes
The “30-fold limit” has been functioning in the system since 1999, restricting the collection of premiums from the highest-earning employees, thus also counteracting the emergence of large discrepancies between the amounts of the retirement pensions paid in future. In 2017, the top cap for the base of the retirement and pension premiums is 127 890 zl. Reaching the so-called 30-fold limit is always linked to crossing into the second tax bracket. When an employee exceeds the amount of 85 528 zl annual income, the surplus of their income is taxed with a 32% rate. The employee therefore pays a higher tax, but thanks to the so-called 30-fold limit, they do not pay the retirement (9.76%.) and pension premiums (1.5%). The employer/ premium payer is also freed from the requirement to pay premiums for pension-retirement insurance (9.76% and 6.5% respectively). Therefore, the net income is not drastically lowered even after falling into the second tax bracket. After the modification to the law, this situation will change dramatically.
After the amendment – even 50% of the salary spent on taxes and premiums
Lifting the 30-fold limit in connection with the salary will increase the size of the premium paid to the ZUS Social Insurance Institution by approx.. 27.5% for the employee and employer. After an update of the regulations, a person earning 15 thousand PLN a month, after falling into the second income tax bracket, will be required to pay a 32% income tax and all of the pension-retirement premiums required. In consequence, an employee falling into the second tax bracket will be paying over half of their remuneration to the state. According to government estimates, about 5 billion more PLN is expected to be paid to the to the Social Insurance Fund (FUS) every year. This sum will be deducted from net remunerations of the employees, thus also increasing the costs for the companies employing them.
One has to keep in mind that there is a plan to introduce Employee Capital Programs (PPK) in 2019, which fill further increase the premium burden on the employees and employers. According to the planned changes, all the employees will be automatically enrolled into the PPK and part of their salary (from 2 to 4%) will be laid aside for their future retirement pension. The employers will also contribute, by paying a minimum of 1.5% of the salary to the programs. At present, the premium burden for the employer already amounts to about 20% of the employee’s salary. After lifting the 30-fold limit and the implementation of the PPKs, this burden will grow further – according to Robert Adamczyk, Project Manager in the Department of Social Insurance and Work Environment at Ayming Polska.
Switching from full-time employment to self-employment
If the 30-fold limit is lifted in 2019 and if the Employee Capital Programs are enacted as well, the total sum of taxes and social insurance premiums paid by the employee alone may exceed 50% of the salary. In contrast, the fine for tax code violators for concealing their incomes is 75%. One can expect that such a heavy burden on people working on full-time contracts will drive them to search for other forms of employment, which in turn will provide smaller PIT revenue for the treasury. It is estimated that the change will affect approx.. 350 thousand highest-earning employees, above all highly qualified specialists and experts, among others from the new technology sector.
Self-employment can be an alternative to the people affected by the change. However, it needs to be kept in mind that it won’t be applicable in every case. It may happen that such a transition will be questioned by the appropriate state administration authorities. The decision to change the form of employment should be thought-through, and its implementation should be carried out well. If the change in the form of employment is questioned by the Social Insurance Institution, the employer/ premium payer is to be held accountable – adds Robert Adamczyk, Project Manager in the Department of Social Insurance and Work Environment at Ayimg Polska.
Implementation of the regulations deferred by one year
If the new regulations come to life in 2019, then a targeted limitation will be enacted, that sets the maximum limit of the base amount for calculating the retirement and pension premiums up to an amount of 133 290 zł. In practice, this means that a person that exceeds the indicated annual salary level in 2018, will not pay retirement-pension premiums from the amount exceeding the specific amount. This limitation will also apply to the basis for calculating the premiums for the Transitional Retirement Pensions’ Fund. These premiums will also not be paid by the employer or job commissioning party.
According to the Senate’s amendment, the amendment will come to life a year later than it had previously been planned. However, considering its negative impact on the employees and business, this is not a satisfactory compromise. Employees and businesses will have to provide that 5 billion PLN additional inflow of funds to the Social Insurance Fund.
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