The New Polish Order and business taxation - what to choose?

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The New Polish Order provides for revolutionary changes in the field of taxes, including those relating to income taxes. Natural persons conducting business activity may choose the optimal form of enterprise taxation. The current assumptions may, however, turn out to be outdated in the light of the planned regulations. Therefore, in the article below, we will consider what will be more profitable for the taxpayer - the tax scale or the flat tax.

Current flat tax regulations

The flat tax is characterized by a constant 19% tax rate, which does not change in relation to the growing income of the taxpayer.

It is payable on income being the difference between the income and the tax expense. The income obtained in this way is not combined with income from other sources, and the annual settlement is made on a separate PIT-36L form, submitted by April 30 of the year following the tax year.

To take advantage of taxation in the form of a flat tax, it is necessary to submit a declaration of choosing this form. This is done by submitting to the competent head of the tax office a written statement on the choice of this method of taxation by the 20th day of the month following the month in which the first revenue was achieved in this respect in the tax year, or by the end of the tax year, if the first such revenue was achieved in December of this fiscal year.

It is also worth addressing the issue of taxable income. Pursuant to Art. 30c of the PIT Act, income tax on income from non-agricultural business activity amounts to 19% of the tax base. It is income. Taxpayers may reduce it by social security contributions, contributions to the individual retirement security account and a donation in the amount of the donation, but not more than the amount representing 6% of income. The amount of contributions and payments is determined on the basis of documents confirming their incurrence.

However, the calculated tax is reduced by the health insurance premium paid.

Note that in the case of a flat tax, the tax-free amount is not taken into account, which is appropriate for the general rules based on calculating the tax on the basis of the tax scale.

Moreover, it should be emphasized that the use of a flat tax is associated with certain limitations. Well, a taxpayer who decides to choose this form of taxation of activity loses the right to settle accounts together with the spouse as a single parent and to a child allowance.

In the current law, flat tax is a form of taxation characterized by a 19% income tax, which does not include a tax-free amount.

Profitability of applying a flat tax

Therefore, taking into account that in the case of the tax scale, the tax rate is 17%, and with a tax base surplus of over PLN 85,528 increases to 32%, we can indicate that now the flat tax is the correct form of taxation for a taxpayer who:

  • as part of his business activity, he earns income in excess of PLN 100,000;

  • does not make settlements with a spouse or as a single parent;

  • does not take advantage of the child tax credit;

  • obtains tax deductible costs as part of its business activities.

Despite the lack of a tax-free amount, in some circumstances it may be beneficial for a taxpayer to choose the form of taxation in the form of a flat tax.

New Polish Order and changes in the tax-free amount

In the current legal state, the tax-free amount is PLN 8,000. This affects the amount of the tax-reducing amount.

According to Art. 27 sec. 1b of the PIT Act, the amount reducing the tax deducted in the annual tax return is:

  1. PLN 1,360 - for the tax base not exceeding PLN 8,000;

  2. PLN 1,360 reduced by the amount calculated according to the formula:

PLN 834 PLN 88 x (basis for calculating the tax - PLN 8,000) / PLN 5,000

- for the tax base higher than PLN 8,000 and not exceeding PLN 13,000;

  1. PLN 525 12/12 - for the tax base higher than PLN 13,000 and not exceeding PLN 85,528;

  2. PLN 525 12/12 reduced by the amount calculated according to the formula:

PLN 525 12 gr × (basis for calculating the tax - PLN 85 528) / PLN 41 472

- for the tax base higher than PLN 85,528 and not exceeding PLN 127,000.

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However, according to the planned amendments, the tax-free amount is to be increased up to PLN 30,000. This circumstance significantly influences the comparison of the flat tax and the tax scale in the perspective of the conducted business activity.

Additionally, the New Polish Deal is to raise the tax threshold from PLN 85,528 to PLN 120,000.

The New Polish Deal provides for an increase in the tax-free amount to PLN 30,000. Still, the tax-free amount will only be applied to the tax scale and not to the flat tax rate. The tax threshold will also increase to PLN 120,000

Tax scale or flat tax - what to choose?

Therefore, taking into account the planned changes, it may turn out that the flat tax ceases to be an economically viable solution.

First of all, in the case of flat tax, it will still not be possible to apply the tax-free amount, which will be very beneficial, as it will amount to as much as PLN 30,000.

Secondly, the amount of the first tax threshold will be increased to PLN 120,000, so taxpayers who currently receive over PLN 85,538 will be able to stay with the flat tax without risking entering the 32% tax rate.

Finally, it is also worth mentioning the changes in health insurance premiums. Currently, the amount of the contribution is a lump sum, while under the Polish Deal it will be 9% of net income in the case of the tax scale or 4.9% in the case of the flat tax.

The changes introduced by the New Polish Deal regarding the tax-free amount and the tax threshold will mean that after the entry into force of the New Deal, for many taxpayers currently taxed with a flat tax, a tax on general principles according to the tax scale may become a more profitable solution.

The New Polish Order is a set of revolutionary regulations amending the existing taxation rules, including those relating to income tax. Many business taxpayers may be faced with a choice between a flat tax and a tax scale.