04.09.2018

Dramatic changes in social contribution tax and health-care contribution system from 2019

Dramatic changes in social contribution tax and health-care contribution system from 2019

The Hungarian Parliament has accepted the 2019 tax law amendments aimed at making the tax regime more efficient. In our article we aim to provide some useful information about the consolidation and changes of the health-care contribution (eho) and social contribution tax (szocho) in order to facilitate related business planning for 2019.

Phase-out of health-care contribution

The health-care contribution and social contribution tax are to be consolidated; therefore, a new act on social contribution tax has been introduced in Hungary (Act LII of 2018 on Social Contribution Tax), which will come into force on 1 January 2019. The new law is compliant with the two acts (on health-care contribution and social contribution tax) currently in force, and is practically a mixture of the two.

The rate of the social contribution tax remains 19.5% of the tax base. Although the health-care contribution will be phased out as a tax type, the social contribution tax will be payable in the future instead as follows:

in relation to income taxed separately under the Personal Income Tax Act:

  • on fringe benefits [Section 71 of the Personal Income Tax Act],
  • on other benefits not considered fringe benefits [Section 70 of the Personal Income Tax Act], and
  • on income from interest allowances [Section 72 of the Personal Income Tax Act].

In addition to the above paragraph, a social contribution tax liability (incurring a 14% health-care contribution so far) will arise as follows:

  • on income withdrawn from business accounts [Section 68 of the Personal Income Tax Act],
  • on income from securities lending [Section 65/A of the Personal Income Tax Act],
  • on dividends [Section 66 of the Personal Income Tax Act] and the corporate dividend base [Section 49/C of the Personal Income Tax Act], and
  • on income from exchange gains [Section 67 of the Personal Income Tax Act].

The legislation contains a tax rate of 19.5% instead of the 14% health-care contribution so far.

Consequently, the tax payable on these incomes will increase in 2019. Currently, the health-care contribution is only paid until the aggregate amount of the health insurance contribution and the 14% health-care contribution paid in one fiscal year reaches HUF 450,000 (approx. EUR 1,400). From 2019 social contribution tax shall only be payable until the income of the natural person reaches an amount of 24 times the minimum wage in the reporting year. When calculating this income threshold, fringe benefits, other benefits not considered as fringe benefits and incomes from interest allowances have to be excluded. To be specific, 19.5% of 24 times the 2018 minimum wage (HUF 138,000 – approx. EUR 425) is HUF 645,840 (approx. EUR 2,000), which is significantly higher than this year’s ceiling. Additionally, this number will change further due to the change (increase) in the Hungarian minimum wage from 2019.

Changes to social contribution tax allowances

The new act on social contribution tax will partly do away with the tax allowances for employing the under 25s and the over 55s, and the tax allowance for businesses operating in completely free enterprise zones. Nevertheless, new tax allowances will be introduced; this way, allowances may also be claimed for employees with a reduced capacity to work and for civil servants, for example. Tax allowances for those entering the labour market will also be introduced.

Allowances that can be claimed in 2019:

  • tax allowances for those working in fields not requiring specialist qualifications and those employed in agriculture
  • tax allowances for those entering the labour market
  • tax allowances for women raising three or more children and entering the labour market
  • tax allowances for employees with a reduced capacity to work
  • tax allowances for civil servants
  • tax allowances for the employment of researchers
  • tax allowances for research and development

Our article does not fully cover the new act on social contribution tax, it only tries to present the most significant changes. Feel free to contact our payroll staff if you have any specific questions regarding the amended act.

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