Significant changes in the taxation of individuals
Several changes were introduced with regards to the taxation of individuals in the Czech Republic that are expected to enter into effect as of 1 January 2021. They will reduce taxation for employees and other individuals with income up to a certain limit while increasing taxation of others with income above that limit.
Decrease in taxation of employment income
The method of calculating income tax from employment activity is going to simplify due to the abolishment of super-gross salary as the tax base. This means that the tax is going to be calculated from the gross taxable employment income without being increased by the employer’s mandatory contributions to social security and health insurance. As the lower tax rate remains 15%, the effective tax rate for employees with income below ca. CZK 1.7 Mio. for 2021 (ca. EUR 65k, further as ‘the Limit’) is going to decrease by up to 5%.
Increase in taxation of tax base above the limit
On the other hand, taxation of other income aside from employment and self-employment above the limit is going to increase as progressive personal income tax is being introduced. The new tax rates are 15% up to the limit and 23% for a tax base above the limit.
The higher tax rate is not going to apply to foreign capital income (dividends, interests from abroad). The progressive tax brings an increase in taxation of tax base above the limit by:
- 8% for income such as rental income, income from sale of real estate, shares and securities or taxable gifts; and
- 1% for income from employment and self-employment activity
There is a significant difference between points i. and ii. because to date, a solidarity tax surcharge of 7% has been applied for the above-limit tax base from employment and self-employment activity.
The basic tax relief is going to increase providing for extra ca. CZK 20k (ca. EUR 0.77k) of tax exempted tax base, the new tax-free tax base equals to ca. CZK 186k (ca. EUR 7k) for 2021.