Renewals: is the 5 per cent levy worthwhile?
The standard rate also applies to previous instalments and does not reduce the deduction
The 1 per cent substitute tax on increases in young people’s income, provided for in Article 44 of the 2027 Budget Bill, has a lower rate than the 5 per cent tax on increases resulting from contract renewals – which is to be extended by one year – but this does not necessarily mean it is more advantageous. For those who, in 2027, will receive only the increases linked to the renewal of the National Collective Labour Agreement (CCNL), the 5 per cent scheme generally leaves a higher amount in their pay packet. Let’s see why.
The two taxes are not cumulative. Paragraph 4 of the new Article 360-octies of the TUIR, introduced by Article 44 of the Budget Bill, excludes the 5 per cent rate for those who apply the 1 per cent rate without opting for the general rules. If the employee takes no action, the withholding agent applies the 1 per cent rate to their payslip and adjusts it at the end of the tax year. To retain the 5 per cent tax rate, a written request must be submitted to the withholding agent.
The first difference concerns the basis. The 5 per cent tax applies to pay rises paid in 2027, with effect from 2025, if they result from contract renewals signed from 2024 onwards: it therefore also covers the instalments for 2025 and 2026. The 1% tax applies only to the increase in employment income compared with 2026, up to a limit of €2,500. Those applying this tax thus treat the increases already received in 2026 as subject to standard personal income tax, whereas under the 5 per cent rate they would remain tax-advantaged.
The second difference concerns the tax allowance for employees, which decreases as income rises. Amounts subject to the substitute tax are excluded from total income, as reiterated in Circular 2/E/2026, and do not reduce the tax allowance. As regards the 1 per cent substitute tax reserved for those under 30, however, Article 44(10) stipulates that, for the purposes of determining entitlement to and calculating income-related allowances, the preferential rate must also be taken into account. Strictly speaking, the 1 per cent rate reduces personal income tax but lowers the tax relief: where the tax relief decreases, the effective tax rate far exceeds the nominal rate.
The tax treatment changes when the increase is not due to a contract renewal. Superminimi, pay grade increases, seniority increments and weekday overtime do not have their own tax relief: without the 1 per cent, they would be taxed at the standard personal income tax rate, and for these items the 1 per cent is advantageous, even taking the deduction into account. However, this choice applies for the entire tax year: anyone who opts for the 1% rate for a ‘superminimo’ loses the 5% relief on all pay bands linked to a renewal of the National Collective Labour Agreement (CCNL). The calculation must be made for all pay rises during the year.
