The UPB simulations

Young people, a flat tax on pay rises isn’t always the best option: here’s when it’s better to opt out

Those under 30 who receive a pay rise following a contract renewal can choose between the 1 per cent tax rate and the 5 per cent tax rate. According to UPB’s simulations, with the 1 per cent rate, the pay rise continues to reduce tax allowances and tax credits, and the effective tax rate can rise to 10 per cent or 30 per cent.

by Lorenzo Pace

13 November 2026

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2' min read

Translated by AI

Versione italiana

2' min read

Translated by AI

Versione italiana

A pay rise in 2027 and two tax breaks to choose from. For employees under the age of thirty, the budget provides for two such reliefs – one already known and one new – and the one with the lowest tax rate is not always the most advantageous. This is demonstrated by the Parliamentary Budget Office through a number of simulations presented during the hearing on the draft budget bill.

The benefits

The first is the 5 per cent tax on pay rises resulting from contract renewals, which has been confirmed for 2027 for private-sector employees with a 2026 income of up to 33,000 euros. The second is new and applies only to 2027: a 1 per cent tax on any increase in income from employment compared with the previous year, up to €2,500, for private-sector employees born after 1997 with an income of up to €28,000. It applies automatically, unless the employee opts out, and the increase is calculated in proportion to the number of days worked.

The two discounts cannot be combined: if the increase results from a renewal, the young person must choose, and by foregoing the 1 per cent discount, they revert to the standard rules, which include the 5 per cent discount.

The differences

What makes the difference is what the increase continues to affect. At 5 per cent, the increase is excluded entirely from the IRPEF calculation and does not reduce tax deductions or bonuses: you simply pay the 5 per cent. With a 1 per cent rate, however, the increase continues to be taken into account for the employee tax deduction, the supplementary allowance and the bonus introduced in 2025, which are reduced as income rises. For this reason, the UPB writes, the 1 per cent rate ‘cannot be defined as a genuine substitute tax’.

The cases

The Parliamentary Budget Office, then, gives two examples. Both relate to two people under 30 with no dependants, in full-time employment throughout the year, with a 3.5 per cent increase:

The first earns 22,000 euros and receives an additional 770 euros: on top of the 7.70 euros in tax, there is a lower deduction of around 70 euros, and the effective tax rate rises to around 10 per cent, double the 5 per cent;
The second person earns 15,000 euros and receives an additional 525 euros, taking them above the threshold on which the supplementary allowance and bonus depend: on top of the €5.25 in tax, they lose over €150 in benefits, bringing the effective tax rate to around 30 per cent. In both cases, if the pay rise comes from a contract renewal, it is better to opt out of the 1 per cent.

The youth tax remains, however, more favourable than the standard tax regime, with a tax rate 22 points lower, and actually becomes negative in the income brackets where the bonus increases with income. It is therefore the right choice when the increase does not result from a contract renewal, for example following a pay rise or a change in pay grade.

However, the UPB notes that it is not straightforward to work out which of the two options is more advantageous: it depends on one’s position in relation to the thresholds, the number of months worked and any other income, with ‘erratic and difficult-to-predict’ effects even for those who have to decide whether to opt out. A reduced tax rate, even a very low one, only truly reduces the tax burden if the resulting increase is also excluded from the calculation of tax deductions and allowances. Otherwise, when close to the thresholds, the benefit ‘may be limited or entirely offset’.