In Hungary, there are approximately 1 million people of working age above 25 years, employers should therefore be aware of the tax incentives relating to the employment of young people. The most significant ones are personal income tax, vocational training contribution, social contribution tax, and contribution allowances as well as corporate tax allowances.
Personal income tax allowance of employees under the age of 25
From 2022, persons under the age of 25 do not have to pay personal income tax on their wage income and on their income from other non-independent activities and from certain independent activities (e.g. service fees, entrepreneurial incomes, etc.).
There are, however, limits to the eligibility for the personal income tax allowance:
- It may only be applied in respect of incomes acquired under the titles specified in legal regulations and
- The tax allowance may only be applied up to a specific value limit calculated as the product of the gross average income of the full-time employees officially published by the Central Statistics Office (for July of the year before the year concerned ) and the number of eligible months.
As a result of the amendment, the work performed as a member of a school association will become exempt from personal income tax from 2022 in addition to the exemption from contribution and social contribution tax. We must also point out that, combined with the preferential taxation rules applicable from 2022 to private entrepreneurs paying lump-sum tax, personal income tax, contribution, and social contribution tax exemption can also be achieved in case of entrepreneurs studying as full-time students in public education, vocational training, and higher education institutions.
Let us see the figures: if the payer pays a gross income of HUF 300,000 this year to a person under the age of 25 under "normal" employment, the employee will receive a net salary of HUF 199,500. Next year, a total of HUF 244,500 will remain at the employer with the "standard" personal income tax exemption, while, in the case of employment through a school association, the total gross income will land in the pockets of the young employee. If the "standard" personal income tax exemption is combined with eligibility for family contribution allowance, the employee's contribution liability will be reduced also.
The tax allowance is intended to bridge the gap of the earners of below-average incomes but it does not exclude the earners of high incomes from the group of eligible persons either as members of this group may also apply for tax exemption up to the value limit. We must note that above the age of 25, young people are no longer eligible for the allowance, i.e. their net income may reduce from one day to the next. Despite the increase in the net salaries of young people, the personal income tax allowance is not suitable, in itself, to reduce employer's burdens.
The new rule shall first be applied on the tax liability of income from employment:
- accounted for the period following 31 December 2021,
- income relating to the year before 2022 but paid after 10 January 2022
(e.g. 2021 bonuses, rewards) or, in other cases, on the tax liability of income acquired after 31 December 2021.
From an administrative perspective, it may be a relief for young people that employers/payers will have to reduce the tax advance base by the amount of the allowance automatically. Still, there is an option for the allowance to be entirely or partly considered by the employee in the annual tax return but, in this case, a declaration is necessary.
Personal income tax, contribution, social contribution tax, and vocational training contribution allowance of employees working under vocational training and student employment contracts
Former student contracts were replaced by vocational training employment contracts from 1 January 2020. Persons employed under vocational training employment contracts qualify as insured persons and, as a result, the actual payment provided to them is considered in the contribution base. As the persons employed under such employment contracts are typically under the age of 25, the above-mentioned tax allowance of the under-25-year-old also applies to their salaries.
For private persons participating in vocational training at a dual training institution under a vocational training employment contract, students completing their compulsory professional internship and persons attending dual training under a student employment contract benefits beyond salary may be granted subject to a preferential personal income tax burden or even with exemption from personal income tax.
In respect of the persons employed in a professional internship or practice training as part of a dual training under a student employment contract or a training program, no contribution is deductible and the payer has no social contribution tax payment obligation either.
In turn, the student will not be eligible for social security services with regard to this legal relationship and this time will not be considered as service time either.
It may also be a relief for employers that the rules relating to the threshold of contribution payment (30 percent of minimum wage) are not applicable in the case of students participating in full-time studies at public education, vocational training, or higher education institutions.
In the case of the employment of young people in employment relationships, the payer may also apply the social contribution tax allowance of new entrants to the labor market subject to certain conditions.
- The allowance may be applied in the first three years of employment.
- The allowance may be applied on maximum the amount of the minimum wage at a rate of the social contribution tax (15.5%) in the first and second year of employment and half the rate of the social contribution tax (7.75%) in the third year of employment.
Although we do not have to calculate with vocational training contribution as an independent tax type for long, we have to mention that the rules in force from 2021 allow taxable persons to reduce the gross vocational training contribution payable by them with regard to young people employed under vocational training and student employment contracts. In addition, vocational training contribution allowance may also be applied based on cooperation agreements concluded with higher education institutions.
In the case of students, the amount of the base norm defining the rate of the allowance is HUF 650,000 in 2021 in the case of dual trailing.
If the student/training participant employed under a vocational training contract concluded for the period of the vocational training (but at least six months) successfully passes his or her professional exam, further tax allowance may be applied.
From 1 July 2021, a change concerning vocational training contribution entered into force according to which not only full but partial social contribution tax allowance may also be considered for vocational training contribution. This means that if the payer is eligible for social contribution tax allowance with regard, for example, to a young person entering the labor market, the payer may, in the future, not only apply for parallel vocational training contribution allowance in the first year of employment but even in the third year of employment when it is only entitled to a partial allowance. However, it is important that in the period of partial allowance, vocational training contribution may also only be reduced partially (by 0.75 percent of the allowance base).
Corporate income tax allowances are available
In addition to employment-related taxes, the Act on Corporate Tax also provides an opportunity for the reduction of pre-tax profit in respect of students attending vocational training at a dual training institution under a vocational training employment contract. The rate of the allowance is 24 percent of the minimum wage of the first day of the tax year for each started month of training for each person attending training.
The corporate income tax base may also be reduced in the case of the continued employment of a person previously employed under a vocational training employment contract after he or she passes the professional exam for a maximum period of 12 months. The rate of employment is the amount of social contribution tax paid with regard to such a person's employment, which will, as a result, also reduce the tax base beyond being accounted for as an expense.
Incentives outside the tax regime
From July 2021, employers may receive a non-refundable subsidy upon submitted requests based on the subsidy conditions of the Enterprise Workforce Support program if they employ persons under the age of 25 or persons registered for at least 1 month as job-seekers under employment relationships. Applications have to be submitted to the state employment body.
The subsidy may be provided for a maximum period of 6 months. The rate of the subsidy is 50 percent of the employer's wage cost but a maximum of HUF 100,000 per month in the case of full-time employment.
This non-tax-regime incentive may supplement and support, subject to specific conditions, the impact of the tax allowances as the two may also be applied jointly.
It is clear based on the above that, after moderation of the pandemic situation, a wide range of incentives will be available to employers both within and outside the tax regime in relation to the employment of the younger generation and potentially, to create a long-term quality workforce base for themselves.