Poland Moves to Uncap Two Key Social Security Taxes

Payroll on Bloomberg Tax is built to get you to the right answer faster and more efficiently. Get all the payroll intelligence you need with Bloomberg Tax expert analysis, perspectives and...

By Jan Stojaspal

Polish companies with employees grossing more than 127,890 zloty ($35,003.49) per year would be required to pay higher social security taxes, effective 2018, under a government proposal to remove the maximum earned gross income on which old age and disability insurance taxes are paid.

The proposal was approved by the Council of Ministers, the decision-making body of the Polish government, Oct. 30 and, if approved by the parliament, is to take effect from the beginning of next year.

Old age and disability insurance are the two biggest components of social security taxes in Poland, and the only two with a capped wage base.

The old age insurance tax rate is 19.52 percent of gross wages and is split evenly between employer and employee. For disability insurance, employers pay 6.5 percent of employees’ gross wages and employees pay additional 1.5 percent.

The maximum earned gross income is set annually at 30 times the average estimated national salary, which is 127,890 zloty ($35,003.49) for 2017.

The aim of the proposal is to promote “social solidarity” while giving high earners the possibility to eventually receive higher pensions, said an explanatory note published by Poland’s Ministry of Family, Labor and Social Policy, which drafted the proposal. Companies would no longer have to continually monitor employees’ gross wages for when the maximum earned gross income has been achieved in a given year and when old age and disability insurance contributions need to be adjusted, the explanatory note said.

But those advantages come with higher labor costs for employers with large numbers of high-earning individuals, such as banks, media companies and IT business, and also losses of net income for many employees, Joanna Narkiewicz-Tarlowska, a tax director at PwC Poland, told Bloomberg Tax in a Nov. 7 telephone interview. She estimated that up to about 500,000 individuals could be affected. “It will be difficult because” employers “will actually have two problems,” she said. “The company cost will increase, and the employee’s net income will decrease.”

For example, an employee earning 15,000 zloty ($4,105.50) per month, or 180,000 zloty ($49,266.00) per year, will cost his employer additional 8,473 zloty ($2,319.06) per year in old age and disability taxes. At the same time, the employee would lose 3,917 zloty ($1,072.08) in annual net salary, she said.

According to Narkiewicz-Tarlowska, companies will need to carefully consider how to address the loss of net income on the part of their high-earning employees at a time of Poland’s unemployment rate hitting historic lows and skilled labor becoming scarce. Poland’s registered unemployment was 6.8 percent in September, the first time it has dipped below seven percent in more than two decades, according to the country’s Central Statistical Office.

Employers “will still have to somehow motivate their employees to work,” Narkiewicz-Tarlowska said. Companies may, for example, implement additional incentive schemes, such as providing employees with stock options, which are only subject to capital gains tax. Unlike traditional employees, board members are free of social security obligations in Poland provided they serve as appointees without employment contract and their remuneration is granted by a resolution of the general shareholders meeting, Narkiewicz-Tarlowska explained.

“It’s common in Poland to sign employment contracts with gross value,” Piotr Liss, a tax partner at RSM Poland in Poznan, told Bloomberg BNA in a Nov. 8 telephone interview. “It means that an employee would need to go to the employer and ask for higher pay. I don’t really think this will happen, barring top positions in multinational firms.” Instead, Liss expects contractual basis for rewarding high-earning employees, such as managers, to begin to change.

“This will be a huge issue for both employers and employees, since it is going to, on one hand, increase costs for employers and, on the other hand, result in employees receiving less money every month,” Liss said.

To contact the reporter on this story: Jan Stojaspal at correspondents@bna.com

To contact the editor on this story: Michael Baer at mbaer@bna.com

For More Information

The proposal approved by Poland's Council of Ministers is available from the country's Chancellery of the Prime Minister.

More information on payroll issues in Poland can be found in the Poland country primer.

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Payroll