Starting from January 2018, natural persons can apply a general income tax allowance of EUR 500 a month, reducing from annual income of EUR 14,400 or higher, until the monthly tax allowance is zero for annual income over EUR 25,200. For annual income between EUR 14,400 and 25,200, calculation of the annual allowance must be based on the formula “6000 – 6000 / 10 800 × (amount of annual income – 14 400)”.
Practical tips and a step plan for employers and employees are the following. For the employer it would be reasonable to explain the following steps to employees:
- Calculate your annual income (use a crystal ball if you have one). This includes annual taxable income earned in 2018 plus dividends received and income earned through a business account (minus social tax). Tax-exempt income, such as income from the sale of a home, is not included in the calculations. NB! If you earn income only from your employer, the employer must calculate the applicable allowance every month under the formula “500 – 500 / 900 × (payment – 1200).”
- Calculate how much allowance applies in your case. For annual income exceeding EUR 25,200, the monthly tax allowance is zero. For annual income less than EUR 14,400, the allowance of EUR 6,000 applies yearly. An income between these two numbers requires application of the formula mentioned above.
- Please think through whether you earn some income from sources other than your employment relationship. If not, do not worry as the employer will calculate the correct amount of tax allowance. However, the Christmas bonus can be a game changer.
- Please think through whether it is reasonable to terminate application of the allowance or not. Remember that if you apply the monthly allowance, a Christmas bonus may terminate the allowance for the whole year retroactively. If annual income is above EUR 25,200 or between EUR 14,400 – 25,200, then it would be reasonable to terminate application and perhaps recover some money from the state in 2019.