In 2024, the 23% income tax rate will have a broader impact on workers and entrepreneurs

Starting next year, the number of workers and self-employed individuals in the Czech Republic subject to the increased 23% income tax rate will significantly increase.

Currently, the elevated tax rate of 23% applies to income exceeding 48 times the average annual salary. The new threshold is planned to be reduced to 36 times.

However, as the cap on insurance premiums remains at 48 times the average salary, a paradoxical situation will arise: individuals with annual incomes in the range of 36 to 48 times the average salary will pay higher taxes than the wealthiest individuals.

What are the current tax rates?

Currently, the Income Tax Law distinguishes between two rates for calculating personal income tax: 15% and 23%. The 15% rate applies to taxpayers whose annual income does not exceed 48 times the average salary (equivalent to CZK 1,935,552 for 2023). If a taxpayer’s income exceeds this threshold, the amount exceeding the limit is taxed at a rate of 23%. For employees, income is based on gross wages, while individual entrepreneurs calculate income after deducting expenses.

For example, if a taxpayer’s tax base for the current year is CZK 2,500,000, the income is divided as follows: The first CZK 1,935,552 is taxed at a rate of 15%, and the remaining CZK 564,448 is taxed at a rate of 23%.

The average salary in the Czech Republic currently stands at CZK 43,967

However, changes are expected next year as the government has already approved a provision that determines the general assessment base for calculating the average salary. The components of this provision include:

• The total accrual base is CZK 40,638;
• The conversion factor for adjusting the overall valuation base is CZK 1.0819;
• The average salary remains CZK 43,967.

The average salary is calculated as the product of the valuation base and the conversion factor. Specifically, 40,638 × 1.0819 = 43,967 Czech Crowns (rounded to the nearest whole Czech Crown). When you multiply this amount by 48, you get CZK 2,110,416. Beyond this threshold, the social security ceiling and, barring any changes, the second income tax rate will apply.

A 23% tax rate for Incomes exceeding 36 times the average salary

The government will reduce the threshold at which the higher 23% tax rate will be applicable as part of the upcoming consolidation package in November. The threshold is decreasing from 48 times the average salary to 36 times, resulting in a broader group of high-income taxpayers subject to the higher tax rate. This measure aims to ensure that these individuals contribute more significantly to the consolidation of public finances, as explained in the accompanying document.

For the year 2024, this means a reduction in the limit from CZK 2,110,416 to CZK 1,582,812. As a result, the monthly salary cap will be 131,901 Czech Crowns. Without the consolidation package approval, the monthly salary cap would have remained at CZK 175,868. For instance, a person with a salary of CZK 150,000 will pay over CZK 1,400 more in income tax following the consolidation package approval.

However, it’s worth noting that the social insurance cap, set at 48 times the average salary, will remain unchanged. This will lead to a paradoxical situation where individuals with incomes between 36 and 48 times the average salary will pay a higher tax amount than those with incomes exceeding 48 times the average salary.

Health-care costs are expected to rise

The consolidation package also includes the implementation of mandatory health insurance, with employees contributing 0.6%. This is estimated to produce 11.9 billion crowns for the state budget this year, and another 1.1 billion crowns in 2025. Employers already pay illness insurance to employees at a rate of 2.1% of gross salaries. These premiums will be deducted from the employee’s earnings under the new arrangement, reducing their net pay.

Furthermore, health insurance costs for self-employed workers will rise from 2.1% to 2.7%. The monthly base, which is determined by the self-employed individual, serves as the basis for calculating health insurance premiums. This monthly base, however, cannot be less than double the amount set under illness insurance requirements for employee participation. The current minimum monthly base for sickness insurance participation is CZK 8,000, with a matching minimum advance payment of CZK 168.

This will increase to CZK 216 following the rate increase. Self-employed people who participate in health insurance and pay the minimal premium will pay CZK 48 each month. It’s worth noting that health insurance for self-employed workers is still entirely optional.

Source

https://www.podnikatel.cz/clanky/23-sazba-dane-z-prijmu-se-dotkne-v-roce-2024-vice-zamestnancu-a-osvc/#google_vignette