On 13 July 2018 the Lithuanian Parliament adopted important amendments to the Law on Personal Income Tax and to the Law on State Social Insurance. The Lithuanian tax reform affecting employment taxation comes into force on 1 January 2019.
The reform includes significant changes to the country’s personal income tax system. With the changes the Lithuanian government aims to reduce overall tax burden on labour and make the social security contribution system more transparent.
The four most important changes brought by the reform are as follows:
- progressive personal income tax is introduced;
- social security contributions by the employer will be merged with those by the employee, while the tax burden will be transferred to the employee;
- rates of social security contributions have been recalculated;
- a ceiling is introduced on social security contributions.
After merging contributions paid by employer and employee, total employment costs and net salary should basically remain unchanged:
Employees earning a salary exceeding the ceiling on social security contributions (in 2019 the ceiling is 120 statistic average wages) will have bigger benefits. When an employee’s salary exceeds the ceiling, social security contributions will no longer apply to the excess. However, the excess will be taxed at a higher rate of personal income tax (i.e. 27%). Taking into consideration that the ceiling on mandatory health insurance contributions will not apply, the portion of salary exceeding the ceiling is taxed at an overall rate of 33.98%.
What employers need to know
The most relevant aspects of the reform for employers are as follows:
- Employers are obliged to recalculate the employee’s gross salary and multiply it by 1.289 by 1 January 2019. The employee’s net salary cannot be reduced due to the recalculation. The recalculation must be executed officially by changing the employment contract. Prior consent by the employee is not required for these employment contract changes. You can find a contract amendment form that we suggest here.
- Employers providing other benefits for their employees (such as employee share options enabling employees to acquire shares in the employer company or group) must take into consideration that the reform might have an impact on taxation of these additional benefits. Companies should assess the possible impact of the reform.