Almost hidden among the Hungarian government’s tax changes for 2022 (personal income tax rebate for parents, personal income tax exemption for people under 25, etc.) are provisions to reduce the tax and related contributions burden on employers by lowering the additional costs resulting from the minimum wage increase. What are these measures and how do they affect the staff costs incurred by companies? Do these measures benefit or hinder companies depending on their size? These are the questions I will be seeking to answer in this article.
What could be the impact of the minimum wage increase?
The minimum wage increase from a gross HUF 167,400 (roughly EUR 457) to HUF 200,000 (roughly EUR 547) – both the almost HUF 33,000 (roughly EUR 90) rise and the 20% difference – is the most significant measure in Hungary over the last decade to improve the incomes of the lowest paid employees. The increase in the guaranteed wage minimum for skilled workers from the gross HUF 219,000 (roughly EUR 600) to HUF 260,000 (roughly EUR 710) is also significant. With these two measures, the government would have imposed burdens on employers leading to a large number of them being forced into near bankruptcy or having to implement significant redundancies.
To avoid this, the government abolished the 1.5% vocational training contribution, reduced the social contribution tax by 2.5 percentage points to 13% and lowered the small business tax rate from 11% to 10%. This latter measure was adopted because in Hungary, small and medium-sized enterprises registered under the small business tax pay social contribution tax on their employees through the small business tax. Since the size of the cost savings achieved by these measures will depend to a large extent on how many people the employers have on the books, and the composition of their income, it is difficult to determine the winners and potential losers of this package. Based on some assumptions, the following picture emerges.
What does this mean for a specific company?
If we simplify the situation by assuming that the rise in the guaranteed wage minimum and the minimum wage increase resulted in an average additional cost of HUF 40,000 (roughly EUR 110) per employee per month, and assuming that the average gross monthly income of employees not in these two categories is around HUF 400,000 (roughly EUR 1,100), then we can conclude the following: if for every two lower-income employees (2 x HUF 40,000 – roughly EUR 2 *110 – extra costs) there are five higher-income workers (5 x HUF 16,000 – roughly EUR 5 * 44 – cost reduction) in a company, the measures will not have affected the company’s costs. If the proportion of employees earning the minimum wage or the guaranteed wage minimum is higher than the above, the firm may face additional costs. If the proportion is lower, it will save costs.
Of course, this rough calculation could be inaccurate because it assumes that the wages of higher-paid employees do not increase. Yet it is precisely the rise in the guaranteed wage minimum and the minimum wage increase that could force these companies to raise the salaries of their higher-paid employees above the average. If we assume that the company would have applied a salary increase of around 5% for all its employees even without the government’s measures, the calculation above changes and a further 4-5% is added to the 5% salary increase for those having a higher income (depending on the proportion of the minimum wage and guaranteed wage minimum earners), because the reduction in taxes and contributions for such a large additional increase will offset the additional burden of the gross wage increase. I would not make any predictions as to whether a 9-10% salary increase is sufficient at a company, or whether the rise in the guaranteed wage minimum and the minimum wage increase might substantially reduce or eliminate the income advantage of those in higher salary categories, which might justify higher salary increases at these levels as well.
Is there any difference depending on the size of the company?
In general perhaps, the larger a company the more likely it is that they employ a smaller proportion of employees earning the minimum wage or the guaranteed wage minimum. This suggests that small and medium-sized enterprises are more affected by the rise in the guaranteed wage minimum and the minimum wage increase.
This disadvantage is addressed by the government’s measure to extend to 2022 the local business tax ceiling at 1% introduced for 2021 to small and medium-sized enterprises with fewer than 250 employees and annual net sales revenue or total assets of no more than HUF 4 billion (roughly EUR 11 million).
Again, I am making the following assumptions based on a rough calculation.
A typical Hungarian company that meets the above criteria has net sales revenue of HUF 2 billion (roughly EUR 5.5 million), its local business tax base is 50% of sales revenue, and 50% of its 80 employees earn the minimum wage or the guaranteed wage minimum. In this example, the additional cost of HUF 40,000 (roughly EUR 110) per month as calculated in the previous section of this article will be HUF 1.6 million (roughly EUR 4,400) per month for 40 employees, resulting in an additional cost of about HUF 20 million per year. The 4% tax and contribution saving for the company’s higher-paid employees amounts to HUF 640,000 (roughly EUR 1,750) per month, or about HUF 7.5 million per year. The company’s local business tax will generate additional savings of HUF 10 million (roughly EUR 27,300) per year compared to the maximum rate of 2%. In total, the government’s package of measures will reduce the company’s earnings by HUF 2.5 million (roughly EUR 6,800).
However, assuming again that the company would have decided to raise the salaries of its higher-paid employees by 5% even without the government’s measures, the savings of a few hundred thousand HUF (roughly a few thousand EUR) from a four-percentage-point reduction in taxes and contributions would mitigate the above-mentioned deterioration in earnings.
What does this mean for the national economy?
Of course, the above examples do not mean that there cannot be companies, or even entire sectors, that will incur much higher additional costs than the average as a result of the government’s package of measures. A number of other market conditions can also affect the profitability of companies. At the level of the national economy, however, we can probably say that the additional burden of the rise in the guaranteed wage minimum and the minimum wage increase will be largely offset by further measures taken by the government in 2022.
If you are uncertain about how your company will be affected by the rise in the guaranteed wage minimum and the minimum wage increase as well as the tax measures to compensate for them, and you need an expert to help you optimise your employees’ wages in 2022, our colleagues are here to help.