2022 was a year of continuous changes in personal taxation laws. Although the pace of change slowed noticeably in the second half of the year, you will have to deal with them in your annual tax return.

However, it doesn't stop here because as of 1 January 2023, further changes to the regulations of great importance to employers and employees, as well as those performing work under civil-law contracts, have come into effect.

Introduction
 

The Polish Deal, which came into force on 1 January 2022, was indeed a revolutionary change in the taxation of personal income, particularly for employees. Some of the changes introduced, such as: raising the tax-free amount to PLN 30,000, raising the tax threshold to PLN 120,000, and introducing new tax exemptions, including for families with many children, were certainly beneficial, as they result in lower tax liabilities.

However, the abolition, after 22 years (!), of the right to deduct health insurance premiums from tax has resulted in an increase in the public burden for employees whose earnings are higher than the income level set by the authors of the Polish Deal to qualify them for the middle class (approx. PLN 152,000 per annum). Also, the abolition of the possibility for single parents to file a joint return with their child in exchange for a small tax relief was a disadvantage for many of them.

At the same time, during the year the Legislature introduced mechanisms aiming to mitigate the effects of this negative change. Some of them applied only to employees earning income from an employment relationship. Contractors and those receiving maternity benefits, for example, were originally excluded from these mechanisms.

The first was the infamous “middle class tax break” which applied automatically if an employee had income ranging from PLN 5,701 to PLN 11,141 per month, unless the employee himself requested that it not be applied.

The second was calculating advance tax payments according to current regulations and those in effect on 31 December 2021, and then comparing them with each other and making the lower advance payment. Issuing a regulation introducing this mechanism, the Minister of

Finance violated the law by causing doubts about the validity of the new regulation. This legislative error was removed by accordingly amending the PIT Act, effective 10 March 2022. At that time, contractors and those receiving maternity benefits were also included in the group of taxpayers eligible for the “middle class tax break.”

The Polish Deal and the ad hoc patching of its shortcomings lasted until mid-2022, when the Polish Deal 2.0. adopted by another amendment to the PIT Act (dated 15 June 2022) abolished the above mechanisms, restored the possibility of single parents to file joint tax returns with their children, and reduced the base PIT rate to 12%. 

Introduction of sanctions for illegal employment was a big change for payers that is not often talked about. If illegal employment is found, pension, disability and sickness insurance premiums on such wages are charged only to the employer, including in the part financed by the insured (employee). These premiums were not tax deductible expenses for employers. 

Illegal employment should be understood as:

• employment by the employer of a person without confirming in writing within the required timeframe the type of contract concluded and its terms,
• failure to report a person employed or performing other gainful work to social security,
• taking up employment, other gainful employment or activity by an unemployed person without notifying the relevant county labour office,

Illegal employment regulations can be interpreted very broadly. One should expect that the tax authorities may try to qualify as illegal employment cases in which the employer has not confirmed the terms of employment in writing at all, as well as those in which, for example, a mandate agreement or B2B contract is concluded, and the actual relationship between the parties indicates the existence of an employment relationship. 

Annual tax settlement for 2022
 

All these changes have left a large number of taxpayers unsure whether their annual tax return will lead to an extra amount to be paid or perhaps a refund. 

The matter is further complicated by a solution introduced only for the purposes of the annual tax return for 2022, in which the tax office calculates a hypothetical tax liability which, by law, will apply to any taxpayer who has earned income this year from an employment relationship, mandate or business activity taxed according to the general rules, in an amount that entitles them to take advantage of the middle-class tax break, i.e. from PLN 68,412 to PLN 133,692. If such a hypothetical tax liability turns out to be lower than the amount resulting from the filed annual return, the taxpayer will receive a refund of the difference between these amounts without having to take any additional action.

However, before such a hypothetical liability can be calculated, the taxpayer must either file a tax return himself/herself or accept (after any changes) a tax return prepared through the “Your e-PIT” service.

The latter solution seems more attractive because of the far-reaching changes in the tax return forms that will be used for the 2022 settlement. The PIT-11 form has also changed, and even transposing the amounts from this information into a tax return filed on the new template will require more attention than before. 

The changes in the forms are mainly due to new tax exemptions that were introduced under the Polish Deal (e.g. relief for working seniors or relief for families raising 4 or more children). If the taxpayer filed to the remitter a timely statement about meeting the conditions for its application, the remitter did the lion's share of the work, deducting the exemption when collecting the advance tax payments during the year. However, if the taxpayer has done it late or has decided to account for a given exemption on his/her own in the annual tax return, this year's tax return may prove to be an insurmountable challenge. 

New PIT-2 form template
 

As a result of the increase in the tax-reducing amount the filing of a statement on its application with the employer had a significant impact on the employees' net incomes in 2022. At the same time, the restrictions on the deadline for filing the statement in effect at the beginning of the year resulted in some taxpayers failing to acquire the resulting entitlements. 
Still in the course of 2022 the legislature has abolished the condition of filing the statement before the first income is earned in a given tax year, and made changes to allow the taxpayers who receive a pension through a remitter to also file the statement. These changes have been incorporated into the wording of the eighth version of the PIT-2 form.

As part of the Polish Deal 2.0, another PIT-2 form template (version No. 9) has been prepared to be used for submitting statements and applications affecting the calculation of monthly personal income tax advances in 2023 and subsequent years.

The purpose of the form has changed. Using it, a taxpayer can make several statements and applications at the same time that affect the amount of the advance payment collected and that previously required the submission of document(s) separate from the PIT-2 form.

Another novelty is the possibility of filing a PIT-2 form regarding the application of the tax-reducing amount by taxpayers who are not employees. Until now, such taxpayers could deduct the tax-reducing amount on their own only in their annual tax return, while in 2023 this can be done by the remitter who collects the advance tax payment on the salary paid. 

The new PIT-2 form also provides the possibility to divide the tax-reducing amount between two or three remitters, or between two legal titles with a single remitter (e.g. in the case of simultaneous employment under an employment relationship and a mandate agreement).

This change makes it possible to take advantage of the tax-reducing amount to the largest possible extent in situations where the remuneration from individual contracts is too low to be able to deduct the entire PLN 300 from the advance tax payment collected on a single contract.  

The new PIT-2 form is not free of shortcomings. The first is the lack of a field in which the taxpayer can indicate which contract with a given remitter (if there are more of them) the submitted statements and applications relate to. It appears that in practice this problem will be solved by indicating the contract to which the submitted form applies in the remitter field. 

In addition, the form does not include the taxpayer's request for application of a higher tax rate in calculating the advance payments and the request for the collection of advance tax payments where the income earned by the taxpayer from work performed outside the territory of the Republic of Poland is subject to foreign taxation. Such requests will have to be made by taxpayers to remitters separately, not with the PIT-2 form. 

However, it should be emphasized that, as a general rule, taxpayers are not required to submit new statements and applications if, in accordance with current regulations, they also apply to subsequent tax years and the circumstances affecting the calculation of the advance payment have not changed. In view of this, remitters should not require employees to submit statements again just because there has been a change in the PIT-2 form.

Change in general rules for submitting statements affecting the amount of the advance payments
 

The Polish Deal 2.0. also introduced, as of 1 January 2023, some changes to the general rules for submitting statements and applications affecting the amount of the advances collected by remitters.

Starting from the new year, the taxpayer submits such a statement or application to the remitter in writing or in any other manner accepted by the remitter. This means that the remitter can introduce a different, more convenient way for employees to submit statements and applications (e.g. electronically) and does not have to use the PIT-2 form for this purpose. For the avoidance of doubt