Taxing Wages 2023

Colombia

Abstract

This chapter includes data on the income taxes paid by workers, their social security contributions, the family benefits they receive in the form of cash transfers as well as the social security contributions and payroll taxes paid by their employers. Results reported include the marginal and average tax burden for eight different family types.

Methodological information is available for personal income tax systems, compulsory social security contributions to schemes operated within the government sector, universal cash transfers as well as recent changes in the tax/benefit system. The methodology also includes the parameter values and tax equations underlying the data.

Colombia’s national currency is the peso (COP). For 2022, the average exchange rate was COP 3 923.67 to USD 1. That same year, the average worker in Colombia earned COP 21 137 925 (country estimate).

Taxes allowances and tax thresholds for the personal income tax system and upper earnings limits for social security contributions are expressed in SMLMV and UVT units. These indicators take into account the inflation rate. At December 31 of 2022, the following currency values applied to these units are:

 

Major revenue items	Unit	COP	USD
Social security contributions	Salario mínimo legal mensual vigente (SMLMV)	1 000 000	254.86
Annual tax thresholds	Unidad de Valor Tributario (UVT)	38 004	9.69

1. Personal income tax system

1.1. Central/federal government income taxes

1.1.1. Tax unit

Each family member declares and pays taxes separately.

1.1.2. Tax allowances and credits

1.1.2.1. Standard tax reliefs

• Relief for social security contributions: Employee’s compulsory social insurance contributions are non-taxable or excluded income for income tax purposes regardless of whether they are paid to government or private sector (See section 2.1 below).

• 25% of total employment payments, up to a monthly maximum exemption of 240 UVT (annual limit of COP 109 451 520). Pursuant to the 2012 tax reform act, in determining the 25% exempt income, the taxpayer must take into account its employment income, less the amount of excluded items, allowed deductions, and other exempt items of income.

• Dependent deduction, up to a limit that cannot exceed 10% of the employees’ monthly income, nor the equivalent to 32 UVT (annual limit of COP 14 593 536).

1.1.2.2 Main non-standard tax reliefs

• Voluntary contributions to pension funds and deposits in the so-called “AFC” bank accounts,1 made on behalf of employees by their employers up to a limit that cannot exceed 30% of the employees’ annual income (taking into account the mandatory payments to the general system on pensions), nor the equivalent to 3 800 UVT (COP 144 415 000). According to tax code, non-compulsory employee´s contributions to voluntary pension funds are considered exempted items.

• The Act 1607 of 2012 (tax reform) allows taxpayers to deduct of their taxable income each one of the next items:

  • Interest paid within a year for mortgage loans, with a monthly limit of 100 UVT (annual limit of COP 45 605 000).

  • Payments made for voluntary health insurance that cover to the employee, spouse and two children or dependent people, up to a monthly limit of 16 UVT (annual limit of COP 7 297 000).

1.1.3. Tax schedule

Because Law 1943 of 2018 was deemed unconstitutional by the Constitutional Court at October 2019, at the end of that year the Congress approved the Law 2010, which kept the income tax regime to individuals in the same way as it was established in the previous tax reform. This tax regime split the individual’s income in three “baskets”: a general basket, that covers labor, capital and non-labor income; a pension basket, and a dividends basket.

The income received by employees is reported in the general “basket”. The taxable income assessed under this basket is the result of summing all earnings realized during the taxable year, minus: (a) all excluded items (refunds, reductions, discounts, and earnings not considered taxable items of income), (b) all allowed deductions (costs, expenses, and other deductions), and (c) all exempt items.

This system keeps the top introduced by Law 1819 of 2016 but now in the general basket, in which the sum of allowed deductions and exempt items should be lower than COP 191 540 160 (5 040 UVT) or 40% of the taxable income (earnings minus excluded items). However, the legislation allows the recognition of costs and expenses related with capital and non-labor income that comply with the requirements for their use into the assessment of the taxable base.

Regarding on the income tax rate, individuals must sum the taxable income that comes from the general basket and the one comes from the pension basket. The income tax rate that applies to this final amount is as provided in the table below:

 

Taxable income (UVT)		Taxable income (COP)		Marginal rate	Fixed quota
Lower limit	Upper limit	Lower limit	Upper limit		UVT	COP
0	1 090	0	41 424 000	0%	0	0
> 1 090	1 700	41 424 000	64 607 000	19%	0	0
> 1 700	4 100	64 607 000	155 816 000	28%	116	4 408 000
> 4 100	8 670	155 816 000	329 495 000	33%	788	29 947 000
> 8 670	18 970	329 495 000	720 936 000	35%	2 296	87 257 000
> 18 970	31 000	720 936 000	1 178 124 000	37%	5 901	224 262 000
> 31 000	and over	1 178 124 000	and over	39%	10 352	393 417 000

1.2. State and local income taxes

No taxes apply to income at state or local government level.

2. Compulsory social security contributions to schemes operated within the government sector

The social security system in Colombia comprises three regimes: the general system on pensions (“sistema general de pensiones”), the general social security system on healthcare (“sistema general de seguridad social en salud”), and the general system on employment risks (“sistema general de riesgos laborales”). The first two operate within the government sector.

The general social security system on healthcare, is financed by public and private funds. The private funds belong essentially to the resources of contributions- contributive regime, which are paid by employers and employees, as well as independent workers, retired persons, and copayments of affiliates at the time of receiving healthcare services. The tax reform of 2016 eliminates the Pro Equity Income Tax – CREE, that had a specific destination for healthcare and was another source of resources2. However, 9 points of the CIT rate will have a specific destination that replaced both two payroll contributions and the portion of the mandatory contribution made by the employer to the healthcare system, regarding on their employees whose individual earnings up to 10 SMLMV. For the rest of the companies, and for all the employees, the total contributions are 12.5% of the monthly wage, of which 8.5% is paid by employers on behalf of their employees whose monthly earnings above 10 SMLMV and 4% by employees. In the case of independent workers, the contribution is also 12.5% but the contribution base is 40% of the monthly income. Although the contributions to the contributive regime are mandatory, they are not classified as taxes but as a NTCP since more than 50% goes to private sector.

The Colombian pension system is a hybrid of two different systems, a defined-contribution and fully-funded pension system and a pay-as-you-go system. The contribution rate is mandatory and the same for both systems. The contributions are 16% of the monthly wage, which are paid 12% by employers and 4% by employees. When the monthly wage is over 4 SMMLV the employee pays an additional rate that goes from 1% up to 2% to Solidarity Fund. Workers can choose between both systems and can switch every 5 years until 10 years before mandatory retirement age. Although these contributions are mandatory, they are not classified as taxes but as a NTCP since more than 50% goes to private sector.

The minimum and maximum base for compulsory contributions is 1 and 25 SMLMV (COP 1 000 000 and COP 25 000 000) respectively. Voluntary contributions can be made to the general system on pensions, and individuals are free to make contributions to a public or to a private pension fund of their choice.

 

Social security contributions	Base of contribution	Rate
Pensions	Earnings or employment income	16.0%
Solidarity Fund	Earnings or employment income	1.0 – 2.0%
Health	Earnings or employment income	4.0% or 12.5%
Employment Risks	Employment income	0.348% - 8.7%

2.1. Employees’ contributions

• For pensions, 4.0% of the employee’s monthly earnings, plus a certain percentage between 1.0% and 2.0% of the amount over 4 SMLMV (over COP 4 000 000). The last is named “contributions to the Solidarity Fund”.

• For health, 4.0% of the employee’s monthly earnings.

• After the Act 1819 of 2016, both, the employee’s contributions to pensions and health are included in the model as non-taxable income for income tax in the Colombian legislation.

2.2. Employers’ contributions

• For pensions, 12.0% of the employee’s monthly earnings.

• For health, 8.5% of the employee’s monthly earnings if individual earnings above 10 SMLMV. Otherwise, 0% of the employee’s monthly earnings.

• Payments for employment risks are mandatory only in respect of employment and are the sole responsibility of the employer; the rate of this contribution ranges between 0.348% and 8.7%, depending on the activity. A representative rate of 0.522% is used in the Taxing Wages calculations.

3. Universal cash transfers

3.1. Marital status-related transfers

None.

3.2. Transfers related to dependent children

The “Family Subsidy” is paid on a monthly basis to an employee that works monthly at least 96 hours and receives monthly employment payments that don’t excess COP 4 000 000 (4 SMLMV). It is assessed on both principal and spouse when they are working at the same time and one of the requirements to receive this subsidy is that the sum of their gross earnings does not exceed COP 6 000 000 (6 SMLMV). The definition of dependents includes children, stepchildren, orphaned brothers and sisters, and parents over 60 years old, all of them economically dependent on the worker.

The amount of the payment is a constant value during the year; it does not have limit related with the number of beneficiaries and it differs between the regions of the country. The annual average Family Allowance or Subsidy to 2022 was COP 507 011 for one beneficiary.

4. Main Changes in Tax/Benefit Systems Since 2019

4.1. Changes to labour taxation due to the COVID pandemic in 2020 and 2021

Through Decree 558 of 2020, the Government reduced the pension contribution rate, from 16% to 3%, decreasing the payment of both employers and employees for the contributions in April and May 2020, but this Decree was deemed unconstitutional by the Constitutional Court in July 2020. This decision means the full payment of the pension contribution at the normal rate for those months later.

5. Memorandum items

5.1.  Identification of an average worker and calculation of earnings

• The source of information is The Great Integrated Household Survey conducted by the National Administrative Department of Statistics (DANE) with the intention of gathering information about employment conditions of people as well as about the general characteristics of the population. This nationwide survey is carried out on a monthly sample.

• The average gross earnings were obtained by multiplying the average hourly wage by the average number of hours worked, according to the quarterly reports and expresses in a monthly frequency. It covers full time workers (taking into account a person who works 40 hours or more in her/his main job in a week).

2022 Parameter values

 

Average earnings/yr	Ave_earn	21 137 925
Allowances	Basic_al	0
	Depend_child	14 593 536
	Exempt_labor_income_limit	109 451 520
	Upper_limit_Ex_and_ded	191 540 160
Income tax	Tax_sch	0	41 424 000
		0.19	64 607 000
		0.28	155 816 000	4 408 000
		0.33	329 495 000	29 947 000
		0.35	720 936 000	87 257 000
		0.37	1 178 124 000	224 262 000
		0.39	And more	393 417 000
Family allowance
Child element	CTR_child	507 011
	CTR_child_limit1	48 000 000
	CTR_child_limit2	72 000 000
Non-tax compulsory payments
Health-pensions Employee	NTC_hlth_pens	0.08	300 000 000
		0.00
	Low_limit_Income_NTC_hlth_pens	12 000 000
	NTC_solid_fund	0.00	48 000 000
		0.01	191 999 999
		0.012	204 000 000
		0.014	216 000 000
		0.016	228 000 000
		0.018	240 000 000
		0.02
	Upper_limit_Income_NTC_solid_fund	300 000 000

2022 Tax equations

The equations for the Colombian system are mostly on an individual basis. But the Family Allowance is assessed on both principal and spouse when they are working at the same time and the sum of their gross earnings doesn’t exceed the limit to receive this subsidy, and otherwise on the principal's earnings. This is shown by the Range indicator in the table below.

The functions which are used in the equations (Taper, MIN, Tax etc) are described in the technical note about tax equations. Variable names are defined in the table of parameters above, within the equations table, or are the standard variables “married” and “children”. A reference to a variable with the affix “_total” indicates the sum of the relevant variable values for the principal and spouse. And the affixes “_princ” and “_spouse” indicate the value for the principal and spouse, respectively. Equations for a single person are as shown for the principal, with “_spouse” values taken as 0.

 

Line in country table and intermediate steps	Variable name	Range	Equation
1. Earnings	earn
2. Total reliefs:	total_rel	B	tax_allow + non_taxable_income
Dependent Children	dependent children	P/S	IF(earn_princ>=earn_spouse;IF((earn_princ*0,1)>depend_child;depend_child;earn_princ*0,1)*(IF(children>0;1;0));0))
Exempt Labor Income	exempt labor income	B	IF((positive(earn_princ-(non taxable income ntcp+dependent children))*0,25)>exempt_labor_income_limit;exempt_labor_income_limit;(positive(earn_princ-(non taxable income ntcp+dependent children))*0,25))
Allowed Allowances	tax_allow	B	IF((40%*(earn_princ-non taxable income ntcp))>='upper_limit_ex_and_ded;' IF((dependent children+exempt labor income)>='upper_limit_ex_and_ded;upper_limit_ex_and_ded;' (dependent children+exempt labor income)); IF((dependent children+exempt labor income)>(40%*(earn_princ-non taxable income ntcp));40%*(earn_princ-non taxable income ntcp);(dependent children+exempt labor income)))
Non taxable income NTCP	non_taxable_income	B	IF(earn_princ<low_limit_income_ntc_hlth_pens;0;tax(earn_princ;ntc_hlth_pens))+(IF(earn_princ>upper_limit_income_ntc_solid_fund;(upper_limit_income_ntc_solid_fund*ntc_solid_fund_r6);IF(earn_princ>ntc_solid_fund_w5;(earn_princ*ntc_solid_fund_r6);IF(earn_princ>ntc_solid_fund_w4;(earn_princ*ntc_solid_fund_r5);IF(earn_princ>ntc_solid_fund_w3;(earn_princ*ntc_solid_fund_r4);IF(earn_princ>ntc_solid_fund_w2;(earn_princ*ntc_solid_fund_r3);IF(earn_princ>ntc_solid_fund_w1;(earn_princ*ntc_solid_fund_r2);IF(earn_princ>ntc_solid_fund_w0;(earn_princ*ntc_solid_fund_r1);(earn_princ*ntc_solid_fund_r0)))))))))
3. Credits in taxable income	taxbl_cr	B	0
4. CG taxable income	tax_inc	B	Positive(earn_princ- Total reliefs+ cred_tx_inc)
5. CG tax before credits	CG_tax_excl	B	Tax(tax_inc, tax_sch)
6. Tax credits	tax_cr	B	0
7. CG tax	CG_tax	B	Positive(CG tax before credits- tax_cr)
8. State and local taxes	local_tax	B	0
9. Employees' soc security	SSC	B	n.a.
11. Cash transfer	cash_trans	J	IF(children=0;0;IF(earn_spouse>0;IF((earn_princ+earn_spouse)>ctr_child_limit2;0;IF((earn_princ+earn_spouse)>=ctr_child_limit1;ctr_child*children;IF((earn_princ+earn_spouse)>0;ctr_child*children*2)));IF(earn_princ>ctr_child_limit1;0;ctr_child*children)))
12. Employer's soc security	SSC_empr	B	n.a.

Key to range of equation B calculated separately for both principal earner and spouse; P/S calculated for principal or spouse only (value taken as 0 for the other earner calculation); J calculated once only on a joint basis. T calculated on a joint basis when both principal and spouse are workers, and otherwise on the principal's earnings.

Notes

← 1.  The so-called “AFC” bank accounts (“cuentas de ahorro para el fomento a la construcción - AFC”) are savings bank accounts specially provided for the acquisition of real estate property, so the funds deposited in such accounts can only be used for the acquisition of the aforementioned property.

← 2.  The 2012 tax reform act introduced this new tax to alleviate the costs of hiring formal labour incurred by private employers. These companies had to be taxpayers into the income tax in order to access to this benefit. In particular, both the companies inside the free trade zones regime and the non-profit entities had to follow with the contribution to the healthcare system, regardless of the earnings of their employees.