Taxing Wages 2023

Latvia

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.

Since 2014, the Latvian currency is the Euro (EUR). In 2022, EUR 0.96 was equal to USD 1. That year, the average worker in Latvia earned EUR 16 758 annually (Secretariat estimate).

1. Personal income tax system

From 1st January 2018, Latvia has introduced an ambitious tax reform. One of the main goals of this reform was to reach Latvian government as well as international expert’s expectations – to reduce the tax wedge, especially for low-wage earners.

1.1. Central government income tax

In 2018 with the labour tax reform the progressive income tax system was introduced for the first time, as well as the differentiated non-taxable minimum, the allowance for dependents and the non-taxable minimum for pensioners was increased, and the minimum monthly wage was raised.

1.1.1. Tax unit

The tax unit are individuals.

1.1.2. The main tax allowance

Standard tax reliefs

• A general (basic) allowance:

Since 2016, the differentiated non-taxable minimum is introduced.

The differentiated non-taxable minimum varies depending on the person's income level: higher for lower wages, but lower or zero for higher wages. The differentiated non-taxable minimum is gradually raised.

In 2020 and 2021 the differentiated non-taxable minimum varies from EUR 0 to 300 per month, but from 1^st January 2022 - from EUR 0 to 350 per month and from 1^st July 2022 from EUR 0 to EUR 500 per month (see table below).

Differentiated non-taxable minimum criteria’s:

	2018	2019	2020	2021	2022
Maximum non-taxable minimum, EUR per month	200	230	300	300	350 | 5001
Minimum non-taxable minimum, EUR per month	0	0	0	0	0
Taxable income* minimum threshold up to which the maximum annual non-taxable minimum is applied, EUR per month	440	440	500	500	500
Taxable income* maximum threshold up to which the annual non-taxable minimum is applied, EUR per month	1 000	1 100	1 200	1 800	1 800

* Calculating the taxable income not only the salary is taken into account, but also other income (such as dividends and income from real estate etc.). Similarly, if a person works in several jobs, the salaries are summed up and the non-taxable minimum is applied to the total revenue

For example, in the first half year of 2022, the maximum tax allowance amount is EUR 350 per month and it is applied to the taxable income below EUR 500 per month. If the taxable income is between EUR 500 per month and EUR 1 800 per month, the differentiated annual non-taxable minimum is calculated according to a specific formula. The allowance gradually decreases until it reaches zero and above income EUR 1800 per month is not applied. It is important to note that from 2018, the differentiated non-taxable minimum in full amount is applied already during the tax year. It is based on the State Revenue Service (SRS) forecast which takes into account the taxpayer’s annual income of the previous year. In 2017 the non-taxable minimum was applied only in the minimum amount for all taxpayers (EUR 60) and only in the next taxation year, when the taxpayer submitted the annual tax return, it was applied based on the annual taxable income data of a person.

• The allowance for dependents

The allowance for dependents is also deductible from the income before taxes.

The tax allowance for each dependant (which in most cases are children) is gradually raised - in 2018 from EUR 175 to EUR 200 per month or EUR 2 400 per year, in 2019 to EUR 230 per month or EUR 2 760 per year and in 2020 to EUR 250 per month or EUR 3 000 per year. In 2021 and 2022 this allowance remained in the same amount as in 2020.

• The taxpayer can apply the allowance for a child aged 18 years and younger and for a child while he or she continues the acquisition of the general, professional, higher or special education, but not longer than until reaching 24 years of age. The allowance for dependents is applicable for a taxpayer's child and in certain cases and under certain conditions for sisters, brothers, grandchildren, spouses, parents and grandparents with disability as well as persons under guardianship.

As of 2016, the rule of law narrowed, removing allowances for unemployed spouse, parents or grandparents, except if these persons are with disabilities.

From 2017, the tax allowance for dependents was expanded by non-working spouse, who is taking care of a minor child with a disability, if the non-working spouse does not receive taxable income or State pension.

In addition, as of July 1, 2018, the allowance is applicable for unemployed spouse who is taking care of:

• one child below 3 years of age;

• three or more children below 18 years or below 24 years of age (if he/she studies), of which at least one is below 7 years of age;

• five children below 18 years of age or below 24 years of age (if he/she studies).

  To support youth employment during the summer (from June 1st to August 31st), parents can still receive tax allowance for dependents (children while they are employed).

  Relief for compulsory social security contributions: Employee’s state social security contributions are deductible from the income before taxes.

  Tax credits: none for employees.

The main exemptions:

• income from rural tourism and agricultural production, as well as of mushrooming, berry-picking or the collection of wild medicinal plants and flowers or an uncultivated species or individuals of non-game species - edible snails (Helix pomatia), if it does not exceed EUR 3 000 per taxation year, including the sums of State aid for agriculture or of the European Union aid for agriculture and rural development, in amount of EUR 3 000 per taxation year;

• insurance compensations, except such insurance compensations paid on the basis of a life, health and accident insurance contract entered into by the employer and a life-long pension insurance contract (with accrued funded pension assets in accordance with the Law on State Funded Pensions);

• insurance compensations which have been disbursed upon the occurrence of an insurable event in relation to the life and health of the insured person due to an accident or illness, in accordance with the life insurance policy (including with accumulation of funds) regardless of who has entered into the insurance contract;

• the supplementary pension capital, which has been formed from contributions of private individuals or their spouse or a person related to their relatives up to the third stage within the meaning of the Civil Law into private pension funds according to licensed pension plans and paid to participants in pension plans;

• income from Latvian or other EU Member State or EEA State and local government bonds;

• capital gains on immovable property, if the ownership of the payer has been for more than 60 months (5 years) and it has been the declared as place of residence of the person for at least 12 months (1 year);

• capital gains on immovable property, if the ownership of the payer has been for more than 60 months (5 years) and the last 60 months (5 years) this immovable property has been the only real estate of the payer;

• capital gains on immovable property which has occurred in relation to the division of property in the case of dissolution of marriage, if it has been the declared place of residence of both spouses at least 12 months until the day of entering into the alienation contract;

• capital gains on immovable property (the relevant immovable property is registered in the Land Register as only immovable property of the payer), if this income is invested a new in a functionally similar immovable property within 12 months following the alienation of the immovable property or before alienation of the immovable property;

• income from the alienation of personal property (movable objects such as furniture, clothing and other movable objects belonging to an individual intended for personal use) except income from the sale of items (tangible or intangible) prepared for sale or purchased, the capital gains and other income from capital and scrap sales;

• scholarships paid from the budget, association or foundation resources;

• scholarships up to 280 euros per month paid by an entrepreneur in accordance with the procedure set out by the Cabinet of Ministers for the organization and implementation of work environment training shall be paid by the merchant, institution, association, foundation, natural person registered as a performer of economic activity, as well as individual enterprise, including farmer or fishermen's farm, and other economic operators;

• grants paid to a student who attends a medical education program to promote the acquisition of an educational program and which is paid out from the institution of health care institution;

• income obtained as a result of inheritance except author's fees (royalty) which is paid to the inheritors of the copyright and for the State funded pension capital which is inherited in case of the death of a participant of a State funded pension scheme;

• allowance (alimony);

• prizes of lotteries and gambling if the amount (total amount) of the prize (value thereof) does not exceed EUR 3 000 per taxation year;

• goods and services lottery prizes;

• material and monetary prizes (premiums) received at competitions and contests, the total value of which in the taxation year does not exceed EUR 143, and the prizes and premiums acquired at international contests the total value of which does not exceed EUR 1 423 a year, as well as the financial incentive paid out to the laureates of the prizes of the Baltic Assembly and prizes of the Cabinet;

• revenues from gifts up to EUR 1 425 from natural person, other than a close relative;

• revenues from gifts in full amount from natural persons, if the giver is connected to the payer by marriage or kinship to the third degree;

• dividends, income equal to dividends or notional dividends if the enterprise income tax has been paid etc.

1.1.3. Tax schedule

From 2018, the personal income tax (PIT) system is progressive (in 2017 the PIT rate was a flat tax rate of 23%).

In 2022, the PIT rates are set:

• 20% - for income up to EUR 20 004 per year;

• 23% - for income exceeding EUR 20 004 but not exceeding EUR 78 100 per year (in 2021 not exceeding EUR 62 800 per year);

• 31% - for income exceeding EUR 78 100 per year (in 2021 exceeding EUR 62 800 per year).

The tax rate 20% and 23% (depending on the level of income) is applicable monthly in the workplace where a payroll tax book is submitted. In the workplace where a payroll tax book is not submitted, only the 23% rate should be applied.

The rate 31% is calculated only in the annual tax return. During the year, the tax is paid as Solidarity tax for an employee whose revenue exceeds EUR 78 100 per year. The Solidarity tax part of 10.0% is transformed into the Personal income tax rate of 31%. The compulsory social security contributions from income above EUR 78 100 per year shall not be paid.

1.2. Regional and local income tax

There are no regional and local income taxes.

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

In 2018, the compulsory social security contribution rate was increased by one percentage point from 34.09% to 35.09% to ensure financing of the health sector (0.5% paid by the employee and 0.5% paid by the employer). From 2021 the social security contribution rate has been reduced by 1 percentage point to the same rate level as it was in force before 2018, i.e. from 35.09% to 34.09% (for employers from 24.09% to 23.59%, for employees from 11% to 10.5%).

The social security contributions covers:

• state pension insurance;

• social insurance in case of unemployment;

• social insurance in respect of accidents at work and occupational diseases;

• disability insurance;

• maternity and sickness insurance;

• parental insurance;

• health insurance.

In 2022, the maximum object of mandatory social payments is EUR 78 100 per year (in 2021 EUR 62 800).

2.1. Employees’ contributions

Employees pay 10.5% of their earnings in social security contributions. The taxable base is the total amount of the gross wage or salary including vacation payments, fringe benefits and remuneration of expenses related to work above a certain threshold. The assessment period is the calendar month.

2.2. Employers’ contributions

Social security contributions are also paid by employers at a rate of 23.59% on behalf of their employees. The taxable base and the assessment period are the same as for employees’ contributions.

The total contribution rates paid by employees and employers in 2022 are divided:

 

Scheme name	Rate of contribution (%)
Pension insurance	23.91
Unemployment insurance	1.6
Insurance of accidents at work and occupational diseases	0.66
Disability insurance	2.29
Maternity and sickness insurance	3.47
Parental insurance	1.16
Health insurance	1.00
Total	34.09

2.3. Solidarity tax

From 2016 the Solidarity tax was introduced.

From 2019 the Solidarity tax rate has been reduced from 35.09% (2018) to 25.50%, and from 2021 to 25%. See more in the table below on the distribution of Solidarity tax rate from 2017 to 2021.

The difference between 2018 and onwards is that:

• in 2018 the Solidarity tax rate is set at the same level as the current social security contributions rates (11% and 24.09%). Solidarity tax is applied during the tax year to the same rate as the social security contributions.

• in 2019 and 2020 Solidarity tax was set at 25.5%, which was less than the current social security contributions rate of 35.09% (11% and 24.09%). In 2021 the Solidarity tax was reduced to 25%. The Solidarity tax is applied during the tax year at the same rate as the social security contributions (34.09% in 2021 and 2022, 35.09% in 2019 and 2020). Therefore, the overpaid solidarity tax is refunded to the employer in the next taxation year.

The tax is paid for the income exceeding the amount of the maximum social security contribution object. From 2022 the social security contribution ceiling was raised to EUR 78 100 per year (in 2019-2021 was EUR 62 800 per year). The taxation period is the calendar year.

The purpose of the Solidarity tax is to eliminate the existing regressivity in the labour tax system and to equalize the tax burden on labour between low-wage earners and high wage earners. This problem appeared when the social contribution ceiling was re-introduced in 2014.

The Solidarity tax applies to all socially insured individuals – employees, self-employed, if their income during the calendar year exceeds the amount of the maximum compulsory social security contributions. Employers are also subject to the solidarity tax (in the same way, as they are liable for paying employer social security contributions).

Solidarity tax rate distribution

		2018	2019-2020	2021-2022
Solidarity tax rate		35.09%	25.50%	25%
Employer's rate distribution:		24.09%	14.50%	14.50%
	State budget (not tied to social services)
	Funded pension (2nd pillar pension scheme) *	6.00%
	Private pension in the Fund's Pension Plan (3rd pillar pension scheme) *	4.00%
	State Pension	13.59%
	Pension insurance		14.00%***	14.00%***
	Health care	0.50%	0.50%	0.50%
Employee's rate distribution:		11.00%	11.00%	10.50%
	State budget (not tied to social services)
	Personal income tax**	10.50%	10.50%	10.00%
	Health care	0.50%	0.50%	0.50%

* If a person is not a member of a funded pension scheme, a private pension fund is transferred 10%.

** The Solidarity tax (paid by employee for income above EUR 78,100 per year in 2022, above EUR 62,800 per year in 2019-2021) part of 10.0% (before 2021 10.5%) is transformed into a Personal income tax rate of 31% (before 2021 31.4%). It means that, by submitting the annual income declaration and performing the conversion of the PIT into three PIT rates (the third rate of 31%), the share of paid Solidarity Tax is equal to PIT rate 31% (before 2021 31.4%).

***From 2019 to 2020, 14% of the paid solidarity tax was transferred to the State pension special budget and registered in the personal account of the taxpayer in accordance with the law On State Pensions (in 2018 13.59% were transferred to the State pension special budget). As of 2021, 14% of the paid solidarity tax are transferred to the State pension special budget non-personalised.

2.3.1. Payroll tax

The Business risk fee is paid in the state basic budget, and then transferred to the Employee claim guarantee fund, which is administrated by the state agency “Insolvency administration”. The Insolvency administration is a public institution controlled by the Ministry of Justice.

If an enterprise is insolvent, the Insolvency Administration satisfies employee claims for their unpaid salaries, compensations for the paid annual leaves and compensations for dismissal in case of the end of the employment relationships.

The Business risk fee does not confer entitlement to any kind of social benefits.

The Business risk fee is a constant payment for a person EUR 0.36 per employee per month.

3. Universal cash transfers

3.1. Transfers related to marital status

None.

3.2. Transfers for dependent children

From 2015, support for families has been introduced through differentiated family state benefits:

• EUR 11.38 per month for the first child,

• EUR 22.76 per month for the second child,

• EUR 34.14 per month for the third child,

• EUR 50.07 per month for the fourth and each subsequent child (only from 2017).

From 1 March 2018 a supplement to the state benefit for families was paid:

• EUR 10 per month for 2 children;

• EUR 66 per month for 3 children,

• additionally EUR 50 per month for each subsequent child

For example, for family with six children the supplement payment was EUR 216 per month (EUR 66 (for 3) + EUR 50 + EUR 50 + EUR 50).

From 2022 the supplement to the state benefit has been abolished and the family state benefit has been significantly increased:

• EUR 25 per month for one child,

• EUR 50 per month for two children (per each child),

• EUR 75 per month for three children (per each child),

• EUR 100 per month for four and more children (per each child).

The state pays family benefits to all children until they reach the age of 16. Children enrolled in basic or secondary schools or vocational education institutions operating on the basis of basic education have the right to receive family benefits until the age of 20.

In addition there are four other types of family benefits for which the payment depends on either the age of the child(ren) and/ or the status of the person(s) looking after them: maternity and paternity benefit; childbirth benefit; parental benefit; child care benefit (additional benefit for child with disabilities). These are not included in the modelling.

4. Main changes in tax/benefit system in 2022

• From January 1 the differentiated non-taxable minimum and the non-taxable minimum for pensioners has been raised from EUR 300 to EUR 350 per month, from July 1 both have been raised to EUR 500 per month.

• The VAT rate for books, press and other mass media issued in the form of printed or electronic publication has been reduced from 12% to 5% and the VAT rate for e-books, newspapers and periodicals and media content in digital format has been reduced from 21% to 5%.

• The maximum social security contribution object has been raised from EUR 62,800 to EUR 78,100.

• The employer's health service has been included in the benefits provided for in collective agreements with a limit of 480 euros per year.

• The family state benefits have been raised (see section 3.2.) and the supplement to the state benefit has been abolished.

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

No specific changes to labour taxation were made due to the COVID pandemic.

5. Memorandum items

5.1. Average gross annual wage earnings

In Latvia the gross earnings figures cover wages and salaries paid to individuals in formal employment including payment for overtime. They also include additional bonuses and payments and other payments such as for the annual and supplementary vacations, public holidays, sick pay (sick-leave certificate A), payment for public holidays and other days not worked, social security compulsory contributions paid by the employees and personal income tax, as well as labour remuneration subsidies.

5.2. Employer contributions to private pension and health schemes

Some employer contributions are made to private health and pension schemes but there is no relevant information available on the amounts that are paid.

2022 Parameter values

 

Average earnings/yr	Ave_earn	16 758	Secretariat estimate
Basic allowance	Basic_al
Minimum non-taxable minimum	MIN_non_taxable	0
Maximum non-taxable minimum	MAX_non_taxable	5 100
Taxable income maximum threshold up to which the annual non-taxable minimum will be applied	Income_for_MIN_non_taxable	21 600
Taxable income minimum threshold up to which the maximum annual non-taxable minimum will be applied	Income_for_MAX_non_taxable	6 000
Coefficient	Coefficient	0.32692
Allowance for dependants	Child_al	3 000
Income tax schedule	Tax_sch	0.20	20 004
	Tax_rate_2	0.23	78 100
	Tax_rate_3	0.31
Payroll tax - Business risk fee	payroll	4.32
Income ceiling	Ceiling	78 100
Employers SSC	SSC_rate1	0.2359
Employers Solidarity Tax	Sol_tax_rate_1	0.145
Employees SSC (without health ins.)	SSC_rate2	0.10
Employees health insurance	Health_ins2	0.005
Employees Solidarity tax (without health ins.)	Sol_tax_rate_2	0.10
Child allowances	CA_one	300
	CA_two	1 200
	CA_three	2 700
	CA_four	4 800
Additional child allowance
Days in tax year	numdays	365

* Calculating taxable income not only the salary is taken into account, but also other income (such as economic activity, pension etc.). Similarly, if a person works in several jobs, the salaries are summed up and the non-taxable minimum is applied to the total revenue.

2022 Tax equations

The equations wes “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.	Allowances:	tax_al	P	=MINA(Basic_al+ SSC_empee_princ+ Health ins2 _empee_princ +(Children>0)*(Child_al*Children);earn_princ)
			S	=MINA(Basic_al+ SSC_empee _spouse+ Health ins2 _empee_spouse,earn_spouse)
	Non-taxable minimum	Basic_al	B	=IF(earn<=0;0;(IF(earn-Income_for_MAX_non_taxable<0; MAX_non_taxable;(IF((MAX_non_taxable-Coefficient*(earn-Income_for_MAX_non_taxable))> MIN_non_taxable; (MAX_non_taxable-Coefficient*(earn-Income_for_MAX_non_taxable)); MIN_non_taxable)))))
3.	Credits in taxable income	taxbl_cr	B	0
4.	CG taxable income	tax_inc	B	=Positive(earn-tax_al)
5.	CG tax before credits	CG_tax_excl	B	=IF((earn- tax_al)<0,0,IF(tax_al>inc_thresh_1,0,IF(earn> inc_thresh_1,( inc_thresh_1- tax_al)*Tax_rate_1,(earn-tax_al)* Tax_rate_1))+IF((earn- tax_al)<0,0,IF(tax_al>inc_thresh_2,0,IF(earn> inc_thresh_2,( inc_thresh_2-IF(tax_al> inc_thresh_1, tax_al, inc_thresh_1))*, Tax_rate_2,IF(earn> inc_thresh_1,(earn-IF(tax_al> inc_thresh_1, tax_al, inc_thresh_1))*Tax_rate_2,0))))+IF((earn- tax_al)<0, 0,IF(tax_al>inc_thresh_2,IF(earn> inc_thresh_2,(earn- tax_al)* Tax_rate_3,0),IF(earn> inc_thresh_2, (earn- inc_thresh_2)* Tax_rate_3,0))))
6.	Tax credits :	tax_cr	B	0
7.	CG tax	CG_tax	B	=IF(CG_tax_excl-tax_cr>0; CG_tax_excl-tax_cr;””””)- tax_cr_non_waste
8.	State and local taxes	local_tax	B	0
9.	Employees' soc security	SSC_empee	B	= MIN(Ceiling;earn)*SSC_rate2
10.	Employees health insurance	Health_ins2		= earn* Health_ins2
11.	Employees’ Solidarity tax	Sol_tax_ee	B	=IF(earn<Ceiling,0,(earn-Ceiling)*Sol_tax_rate_2)
12.	Cash transfers	cash_trans	J	=IF(Children<1;0;IF(Children=1;CA_one;IF(Children=2;CA_two;IF(Children=3;CA_three;IF(Children=4;CA_four;IF(Children>4;CA_four/4*Children))))))
13.
14.	Employer's soc security	SSC_empr Payroll taxes	B B	= MIN(Ceiling;earn)*SSC_rate1 =payroll
15.	Employer’s Solidarity tax	Sol_tax_er	B	=IF(earn<Ceiling,0,(earn-Ceiling)*Sol_tax_rate_1)

Key to range of equation B calculated separately for both principal earner and spouse P calculated for principal only (value taken as 0 for spouse calculation) J calculated once only on a joint basis.

Note

← 1.  From 1st January 2022 EUR 350 per month, from 1st July 2022 EUR 500 per month