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Union: Payroll fees may trigger an increase in income tax

Finland's Taxpayers' Federation warns members to prepare for an increase of half a percentage point in the rate of income tax.

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Image: Mesut Turan / Lehtikuva

Recent changes to payroll fees, introduced as part of Finland's competitiveness pact signed by former Prime Minister Juha Sipilä in 2016, may lead to an increase in the rate of income tax, according to the Taxpayers' Federation.

The change will see a rise in employees' social security contributions, such as earnings-related pension and health insurance contributions.

"More than half a billion euros of purchasing power will be lost to the payroll fee. For a typical, middle-income employee, this could mean a loss of about 250 euros per year," explained Teemu Lehtinen, CEO of the Taxpayers' Federation. "Naturally, it will also weaken demand in the economy."

As a result of the changes, the income tax rate is predicted to rise by 0.5-0.6 percentage points, depending on the taxpayer's income level.

"As these social contributions go up and purchasing power is reduced, the government could, in a budget move, lighten other taxes so that, overall, wages do not go down. It would require action from the government," Lehtinen said.

One possible option available to the government would be a reduction in unemployment insurance premiums, although such a move would not fully offset the loss of income for the average taxpayer. The government will begin budget negotiations next week, and decisions on this issue are expected by the end of the year.

"We estimate that next year's payment could be at the current level or at most be reduced by 0.6 percentage points from the overall level. Decisions on what contributors will pay next year will be made at the end of August," explained Janne Metsämäki, CEO of Finland's Employment Fund, which collects and distributes unemployment insurance contributions.

Metsämäki added that current economic forecasts predict greater than average risks and uncertainties. At the very least, the decline in unemployment is slowing down or may even turn to a slight increase.

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