New rules on labour taxation in Lithuania
Till December 31 2018 social security contributions arising from employment income are divided by both employer and employee in Lithuania. The employer pays 31.18% social security tax and 0.18% of the guarantee fund and long-term unemployment contributions, while the employee pays 9% social security and health insurance taxes.
The revision of the Law on State Social Insurance consolidates social security taxes on the employee’s side and starting from January 1 2019 changes taxation related to employment relations.
From the New Year the employee shall pay:
- 20% or 27% resident income tax;
- 19.50% social insurance contribution;
- 1.8% – 3% pension accumulation contribution (calculated at the choice of the employee).
The employer shall additionally pay:
- 1.47% social security contribution;
- 0.32% the guarantee fund and long-term unemployment contribution.
We draw your attention that according to amendments on Law on Personal Income Tax, the personal income tax will be related to annual employment income:
- 20% resident’s income tax shall be paid from income part which is below the sum of 120 official
- 15% resident’s income tax shall be average monthly wages per year;
- 27% resident’s income tax shall be paid from income part which is over the sum of 120 official average monthly wages per year;
- paid from the sickness, maternity, paternity, childcare and long-term work benefits.
Requirements to change employment contracts
The following reform has put new obligations on businesses. The new legal regulation provides that until January 1 2019 employers are required to recalculate the wage of employees before taxes, increasing it 1.289 times, and, accordingly, change the employment contracts.
It is facilitated by the fact that the law provides a simplified procedure for the change of employment contracts in this way. In this case the written permission from the employees is not needed for changing the wage of an employee.
Two actions to be done by the employer
Firstly, the employer shall inform employees about future changes. Employees may be informed by email or by providing them notice in any other way indicated in local law. It is recommended to indicate in the notices the following: the basis for the change of the employment contract, the procedure of recalculation of the wage, the size of recalculated wage and the date from which the amendments will enter into force.
The second step is to make changes to the contracts of employment. Although there is no official position of the State Labour Inspectorate, it is understood that employment contracts in the order specified in law – by increasing the wage by 1,289 times – can be changed by unilateral decision of the employer, by the provision of an updated notice on working conditions and by agreement between the parties to the employment contract. The employer has the right to choose a form suitable for him.
It is important to keep in mind that such a procedure is suitable only for the conversion of a fixed wage. When changing the indicators of the calculation of the variable part of the employee’s salary (base, size, etc.), the employment contracts should be changed according to the procedure established in the Labour Code – with the prior written consent of the employees.
Obligation to review variable part of wages
The law indicates that due to the transfer of social security contributions to the employee, the employee’s wage cannot be reduced. In order not to diminish the amount of the employee’s bonus or additional pay after deduction of taxes, the amount of it before tax deductions stipulated in the employment contracts must increase. In other words, employers must also review the part of the variable wage amount paid to employees, if it is provided for in the employment contracts before tax deduction.