New taxes under Polish Deal 2.0

Effective January 1, 2022, the tax regulations introduced as part of the Polish Deal (which is now already referred to as "Polish Deal 1.0") proved so problematic that after just six months in effect they were replaced by other, intended to be better and simplify the tax system.

One of the main changes to the tax law, effective as of July 1, 2022, and introduced as part of "Polish Deal 2.0," is the reduction of the income tax rate from 17% to 12% in the first tax bracket for general taxpayers. The widely criticized middle-class relief has also been eliminated, but this will mean that few taxpayers will benefit from the above PIT reduction. The good news, however, is that even fewer people will lose out on this tax cut, which, given the level of complexity of the tax laws and the pace of the changes, is not obvious either.

The income tax reduction will primarily benefit taxpayers who, settling under the general rules, have annual incomes close to or exceeding the amount of PLN 120,000. This group will save a maximum of PLN 4,500, in case the previous regulations with a income tax rate of 17% were in effect. However, for smaller incomes, under the regulations in effect until June 30, 2022, the taxpayer could take advantage of the middle-class relief. This means that for those with income up to PLN 100,000, the changes will be minimal or completely neutral.

At the same time, it should be emphasized that the regulations apply retroactively, so to speak – this means that the new reduced income tax rate will apply throughout 2022, despite the fact that the regulations came into force only in the middle of the year. What's more, a mechanism has been introduced for the so-called hypothetical tax due for 2022. This means that if, after the introduction of the new regulations and the elimination of the middle class relief for the whole of 2022, it would turn out that the taxpayer would nevertheless pay more, the competent head of the tax office should refund the taxpayer the amount of the difference, as if the 17% rate and the middle class relief had been in effect for the whole of 2022 (and thus according to the rules of "Polish Deal 1.0").  Thus, at least under the assumptions, no taxpayer should lose out on the changes introduced by Polish Order 2.0 in 2022.

On the other hand, the professional group whose tax burden may be increased is university teachers. This is because these individuals were allowed to deduct up to 50% of deductible expenses against the salary they received. If this salary was within the range of the middle-class relief, the combination of being able to deduct 50% of deductible expenses and the middle-class relief made the tax burden low. However, as indicated, thanks to the mechanism of the hypothetical tax due, this group in 2022 should not be adversely affected by the introduced legislation.

What remains unchanged, however, is the 9% health contribution rate, which will still not be deductible from income. Realistically, therefore, compared to 2021, the tax burden will not decrease, and will even increase slightly. Of course, in addition to income tax and health premiums, one should also keep in mind social security contributions, which are also getting higher every year.

Changes effective from July 1, 2022 also include taxpayers who account for their income in a different way than the general rules, which mainly concerns entrepreneurs who settle with a flat tax, lump sum or use a tax card. These taxpayers will be able to deduct health premiums from income, but not without restrictions.

In the case of those settling a flat tax, a limitation in amount has been introduced – namely, the tax base can be reduced by the health premiums paid, but the amount cannot exceed PLN 8,700 per year (even if the sum of health premiums paid for the year was higher).  On the other hand, in the case of taxpayers settling in a lump sum, a relative limitation has been introduced – they will be able to reduce the income that constitutes the tax base by 50% of the amount of health premiums paid. A similar restriction has been introduced for those settling on the basis of a tax card – this group will be entitled to reduce taxation by 19% of the health premium paid.

The changes introduced should be viewed as positive insofar as the much-criticized middle-class relief was eliminated, as well as the system in which the entrepreneur had to predict what income he would receive in a given tax year in order to choose the most favorable form of settlement for himself. It should also be acknowledged that the elimination of this relief also somewhat simplified the entire tax system, which is extremely complicated especially in Poland. On the other hand, it can be pointed out that the income tax reduction combined with the elimination of the middle-class allowance will increase the income of only high earners, and such a consequence of the changes can be evaluated very differently. The introduction of a hypothetical tax due can also be assessed in two ways – this mechanism should protect taxpayers from the negative consequences of fiscal changes introduced during the tax year, while this construction will certainly not make the work of accountants and tax offices easier, who will often have to make painstaking calculations to determine which of the tax systems in effect in 2022 was more favorable to the taxpayer.