Recently, the General Directorate of Taxes has published an official notice regarding changes in payroll and the way employees' personal status is declared. These changes are in implementation of Law no. 29/2023 “For Income Tax.
Has the tax you have to pay changed?
There is no change in tax payable for wage income, at all levels. The tax payable from January 2025 is identical to the tax payable for each salary level as it was in December 2024.
The purpose of the new law is to unify and modernize the way individuals earn income and how they pay taxes on that income. The law provides for the full payment of taxes by individuals on income from employment, as an individual (self-employed or trader), and from investments.
To help businesses and employees accurately calculate income tax on employment, AlProfit Consult has prepared an Excel document that helps simulate the tax payable based on individual employee data. You can find this material attached to this writing.
This tool allows you to input salary, deductions, and other tax factors to get an accurate overview of tax liabilities. If you need help using it, you can contact the team at AlProfit Consult.
What is the Declaration of Personal Status?
The Statement of Personal Status is a mandatory document that must be completed and signed by the employee and employer before any tax deductions are applied from the gross salary.
An employee may not submit this statement to more than one employer during the same calendar period. The employer receiving the statement will apply tax deductions, while others will withhold income tax on gross salary, excluding deductions.
The personal status declaration is a document that must be signed by the employer and the employee for the employer to have the right to make tax calculations and apply deductions allowed by law.
Some important questions:
Should previously employed employees fill out the declaration? They only need to complete this statement once at this time.
How does the declaration affect those with more than one employer? Only one employer will be able to implement tax deductions, while others will calculate tax on gross salary.
What happens if income includes bonuses or other benefits? If an employee receives non-monthly bonuses or benefits, the payroll manager must calculate and deduct them on a monthly basis.
Do self-employed individuals need to complete this statement? Yes, the self-employed are exempt from this obligation.
What are the possible discounts and how are they applied?
Deductions from the tax base include:
- 50,000 lekë per month, for incomes up to 50,000 lek.
- 35,000 leke per month, for income over 50,000 up to 60,000 lek.
- 30,000 lekë per month, for income over 60,000 lek.
- 48,000 lekë per year for each dependent child (under 18 years of age), which may be claimed by the parent with the higher income.
- Child education expenses until 100,000 lekë per year, for individuals with an income below 1,200,000 lekë per year.
Deductions for children for care and education are obtained by completing the Individual Declaration.
Tax on voluntary pensions
The amount deducted from the salary for voluntary pension funds (based on Article 20 of the Law 29/2023 “On Income Tax”), as amended), the value of the monthly contribution is deducted from the employee's personal income for the purpose of calculating and withholding tax. This deduction cannot exceed the value of the minimum wage approved at the national level (currently the approved minimum wage is 40,000 ALL).
Concrete examples of tax calculation
Example 1: The case of dual employment where the tax payable is equal and no liabilities arise.
Employee K.P. is employed by the company “Alpha” and has an employment contract with a gross monthly salary of 100,000 lek. At the same time, K.P. works part-time in the evening at entity “Beta,” with which he has an employment contract for a monthly gross salary of 50,000 lekë.
Employee K.P. submits to employer "Alpha" "Declaration on Personal Status" and on that basis, the employer includes the employee on the payroll and calculates the personal income tax on the salary: 100,000 – 30,000 = 70,000 × 13% = 9,100 lek tax.
Employee K.P. must not submit the “Declaration of Personal Status” to the second employer, “Beta.” Employer “Beta” calculates on the payroll the personal income tax liability as 50,000 × 13 ⅓ % = 6,500 lek tax.
At the end of the year, by March 31 of the following year, individual K.P, based on Article 67 of the law, is required to file the “Annual Personal Income Statement,” in which he will recalculate the personal income tax liability on wages, since he has been employed by two employers.
- Monthly income from earned wages: 100,000 + 50,000 = 150,000 lek.
- Tax payable on income realized: 150,000 – 30,000 = 120,000 × 13% = 15,600 lekë.
- Tax on monthly base paid during the year: 9,100+6,500= 15,600 ALL per month.
- Overpaid or payable tax: zero.
Example 2: The case of dual employment when tax payment is higher and a tax credit arises
If the income of the individual K.P., who would work part-time for both employers, were 25,000 lek at the first employer and 25,000 lek at the second employer.
- Monthly earnings from wages received: 25,000 lek + 25,000 lek = 50,000 lek.
- Monthly payable tax on income realized: 50,000 – 50,000 = 0; 0 × 13% = 0 lek.
Monthly tax paid during the year: i. 25,000 lek – 25,000 = 0 => 0 x 13% = 0 lek tax; and ii. 25,000 x 13 % = 3,250 lek tax. Total tax paid 3,250 lek.
Overpaid tax: 3,250 lekë – 0 lekë = 3,250 lekë per month or 39,000 lekë per year, which are returned to the employee.
Example 3: The case where the annual tax payable is higher than the tax paid and a tax liability
If the monthly income of individual K.P. were 200,000 lekë from the first employer and 180,000 lekë from the second employer.
- Monthly earnings from wages received: 200,000 + 180,000 = 380,000 lek.
- Taxable income for income earned 380,000 – 30,000 = 350,000 ALL per month.
- (170,000 x 13 %) + (180,000 x 23 %) = 22,100 + 41,400 = 63,500 lek tax per month.
- Monthly tax paid during the year: i. 200,000 lek – 30,000 = 170,000 × 13 % = 22,100 lek tax; and ii. 170,000 × 13% + 10,000 × 23% = 24,400 lek tax. Total tax paid: 46,500 lek.
- Additional monthly tax to be paid: 63,500 – 46,500 = 17,000 lekë per month or 204,000 lekë per year, which the employee must pay by March 31 of the following year according to the “Annual Personal Income Tax Return”.
To be treated as employment income and for the tax liability to be calculated according to the progressive rates of 13% and 23% provided for in the law, the employer must also be responsible for calculating the obligations for social security and health insurance contributions.
Example 4: Another case
Individual “A” works full-time as a financier at the company “XX” and has a gross salary of 70,000 lekë per month or 840,000 lekë per year. Meanwhile, he also works part-time at an accounting firm for a salary of 40,000 lekë per month, or 480,000 lekë per year.
Calculation of deductions from the tax base:
Individual “A” chooses to sign the Personal Status Declaration with the accounting office. The accounting office withholds income tax on employment and is also required to take into account the monthly deduction from the tax base. Specifically, individual “A”'s taxable income from the accounting office is 40,000 lekë per month. The law provides that for salaries up to 50,000 lekë/month, a deduction of up to 50,000 lekë/month applies. In this case, the employee has a salary of 40,000 lekë/month.month at the accounting office, where after applying the tax deduction the taxable base remains zero, and in this case the employee has zero tax liability on the employment income they receive at the accounting office.
Company “XX,” in accordance with paragraph 1 of Article 65 and paragraph 1 of Article 24 of the law, applies a progressive tax of 13% and 23% on wages and does not apply any deductions to the tax base.
A personal income taxpayer with annual taxable income from employment and/or annual taxable income from business of less than 1,200.000 lekë may deduct, in addition to the individual amounts under the paragraph above, current expenses for the education of his dependent children, up to a maximum of 100,000 lekë;
The request for a deduction from the tax base for education expenses is made by the family member with the highest annual taxable income, through the annual income tax return.
Example 5: Method for Calculating Personal Income Tax from Employment, Business, and Investments
Individual “A” works in a programming office and her gross salary is 230,000 lekë per month or 2,760,000 lekë per year. Individual “B” (the spouse of Individual “A”) has a business trading plumbing and sanitary equipment and has net income of (taxable profit) 3,250,000 lekë/year. Meanwhile, individual “A” has a term deposit from which she receives interest of 20,000 lekë/year, while individual “B” holds shares in the company “XX,” which for this year has paid dividends of 25,000 lekë/year. Individuals “A” and “B” also have three children, aged 13, 15, and 19, respectively.
a) Calculation of income tax from employment:
Individual “A” has employment income of 230,000 lekë per month or 2,760,000 lekë per year, Thus, her income exceeds the amount of 60,000 lek per month, and the deduction from the taxable base that individual “A” receives, as referred to in paragraph 1 of Article 22 of the law, is 30,000 lek per month. Also, individual “A” has two children under the age of 18, for whom a tax-base allowance of 48,000 lekë per child is granted, i.e. 96,000 lekë in total; however, since he is the spouse with higher income, he will be the individual “B” is the one who will claim this tax-base relief, as well as the deductions provided in paragraph 2 of Article 22. The income tax on employment income that individual “A” will pay will be:
Annual income from employment of 2,760,000 ALL/year is reduced by the deductions provided for by this law. 2,760,000 ALL/year – 360,000 ALL/year = 2,400,000 ALL/year annual income, after deductions and compensations are applied, is taxed:
2,040,000 lek/year * 13% + (2,400,000 lek/year – 2,040,000 lek/year) * 23% = 265,200 lek/year + 82,800 lek/year = 348,000 lek per year tax that individual "A" pays on employment income.
b) Calculation of business income tax:
Individual “B” has annual net income as a self-employed person in the amount of 3,250,000 lekë. Referring to paragraph 1 of Article 22, his income exceeds 600,000 lek per year, so the tax-base deduction he receives is 360,000 lek. Individual “B,” as the highest-earning taxpayer in the family, will receive a tax-base offset of 48,000 lekë for each child under the age of 18, i.e., 96,000 lekë in total for the two children under 18. Meanwhile, individual “B” does not benefit from the tax base deductions provided in paragraph 2 of Article 22, since annual income exceeds 1,200,000 lekë.
The annual net income from the business is reduced by the tax deductions and allowances provided for in this law.
3,250,000 lekë/year – (360,000 lekë/year + 96,000 lekë/year) = 2,794,000 lekë/year
The annual net income (taxable profit), after applying deductions and credits, is less than 1,400,000 lek per year, and this income is taxed as follows:
222,794,000 lekë/year × 15% = 419,100 lekë/year tax that individual "B" pays on business income.
c) Calculation of income tax from investment:
The income from the term deposit of individual "A" and the dividend income that individual "B" received from the investment in stocks are investment income. The investment income tax that individual "A" will pay on the interest earned from the term deposit will be: 20,000 lek/year * 15% = 3,000 lek. The investment income tax that individual "B" will pay on dividends received from the stock investment will be: 25,000 lek/year * 8% = 2,000 lek.
Conclusion
The new changes require employees and employers to respect the personal status declaration to benefit from tax base deductions. This will ensure a fair calculation of income tax from employment.
These requests will not affect the income tax on salary payments you currently make or the amount of social and health insurance contributions you pay.
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Source: General Directorate of Taxes.