Lithuania
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.
The Lithuanian currency is the Euro (EUR). In 2018, EUR 0.85 was equal to USD 1. In 2018, the average worker in Lithuania is expected to earn EUR 11 121 (Secretariat estimate).
1. Personal income tax system
1.1. . Central government income tax
1.1.1. Tax unit
The tax unit is an individual.
1.1.2. Tax allowances
1.1.2.1. Standard tax reliefs
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A general (basic) allowance (tax-exempt amount) is applied in calculating the taxable income of residents to the extent the income is derived from employment or similar relationships. However, the size of the annual tax-exempt amount depends on the total amount of annual taxable income before taxes and all allowances (hereinafter – annual income). In 2018 the annual tax-exempt amount is EUR 4 560 for individuals whose annual income does not exceed twelve minimum monthly wages effective on 1 January of a respective calendar year (EUR 4 800 in 2018). For others, the annual tax-exempt amount is estimated using the following formula:
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4 560 – 0.5 x (annual income – twelve minimum monthly wages effective on 1 January of a respective calendar year).
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If according to this formula a negative amount is calculated, then the tax-exempt amount is not applied. As such, no basic personal allowance applies if annual income exceeds EUR 13 920.
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An allowance for disadvantaged is applied as follows: in 2018 the annual tax-exempt amount applicable to individuals with a working capacity level of 0-25% or individuals who have reached the retirement age and have an officially recognized high level of special needs, or individuals with high-level disability, is EUR 5 400. The annual tax-exempt amount applicable to individuals who have a working capacity level of 30-55% or individuals who have reached retirement age and have an officially recognized level of medium or low special needs, or individuals with medium or low-level disability, is EUR 4 680. The tax allowance for disadvantaged is not included in the Taxing Wages calculations.
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Non – standard tax reliefs applicable to income from employment
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Contributions to 3rd pillar pension funds, as well as additional voluntary health insurance contributions paid by the employer on behalf of an employee, are treated as non-taxable income (when such contributions combined do not exceed 25% of the gross wage).
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The following expenses incurred by a resident of Lithuania during the tax period may be deducted from his annual income (a total no more than 25% of annual income worth of expenses):
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Life insurance contributions paid for his own benefit or for the benefit of his spouse or minor children (adopted children) under life insurance contracts which provide for an insurance benefit not only upon the occurrence of an insurance event, but also upon the expiry of the term of the insurance contract.
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Voluntary 3rd pillar pension contributions paid for his own benefit or for the benefit of his spouse or minor children (adopted children) to pension funds.
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The deduction of expenses described above on life insurance and voluntary 3rd pillar pension funds savings tax reliefs apply only to insurance premium of up to a total of EUR 2 000 per year.
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Payments for studies (when the first higher education and/or qualification is obtained upon graduation, as well as doctoral studies and art post-graduate studies) made by studying residents of Lithuania. If the resident does not have annual income, the deduction of expenses from the income can be made by parents and/or spouse. If payments for studies are made with borrowed funds (a loan is taken out from a credit institution for that purpose), the repaid amount of the loan during the tax period may be deducted from income.
1.1.3. Tax schedule
A flat personal income tax rate of 15% applies for taxable wage related income. The tax is withheld from employee’s wage and paid up to two times a month.
1.2. Regional and local income tax
There are no regional or local income taxes.
2. Compulsory social security insurance system
The compulsory social security insurance system consists of the following types of social security contributions:
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pension insurance;
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health insurance;
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sickness and maternity insurance;
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unemployment insurance;
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insurance from accidents at work and occupational diseases.
2.1. Employees’ contributions
Employees pay 6% of their gross wage (including basic wage, bonuses, premiums, additional pays, severance pays, compensations calculated for annual and special leave as well as the monetary compensations calculated for unused annual leave, allowances and other benefits) in contributions for the health insurance and 3% of their gross wage in contributions for the pension insurance. The assessment period is the calendar month.
2.2. Employers’ contributions
Social security insurance contributions are also paid by employers on behalf of their employees. The taxable base and the assessment period are the same as for employees’ contributions. The following types of employers’ contributions and rates are applied:
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pension insurance – 22.3%;
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health insurance – 3%;
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sickness and maternity insurance – 3.6%;
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unemployment insurance – 1.4% for termless employment contracts and 2.8% for fixed-term employment contracts
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insurance from accidents at work and occupational diseases – the overall rate is 0.2% (this is the rate that is modelled). In practice four categories of employers are set according to their history of accidents at work and occupational diseases. The tariffs for each of these categories are:
Starting from 1 January 2018 a minimum amount (“floor”) of state social insurance contributions is established. Employers must calculate and pay employer’s share of state social insurance contributions from a base not lower than minimum monthly salary (MMS), which in 2018 was EUR 400. As of 1 July 2018 employers must pay not only the employer’s share, but also the employee’s share of social insurance contributions from a base not lower than MMS. Exceptions apply in cases where:
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The person has more than one insurer in Lithuania during the respective period;
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The person receives social insurance pension from the State Social Insurance Fund;
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The person is not older than 24 years;
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The person is disabled;
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The person receives allowance for maternity or paternity leave.
3. Payroll tax
Employers pay 0.2% of the gross wage to the Guarantee fund.
If a company goes bankrupt the Guarantee fund is used to satisfy employees’ claims for their unpaid salaries, cash compensations for the unused annual leave, severance pay, pay for the damage caused by occupational accidents or diseases and payment for idle time.
Employers pay 0.5 % of the gross wage to the Long-term employment benefit fund.
The Long-term employment benefit fund is used for paying severance payments to long-tenure employees having lost jobs.
Some employers are exempt from these taxes, namely the Lithuanian Central bank and budget institutions (exempt from both Guarantee and Long-term employment benefit funds contributions), political parties, unions, religious organisations, embassies and branches of non-EEA companies, registered in Lithuania (exempt from Guarantee fund contributions). Given that the model covers the private sector only (sectors B to N by NACE Rev.2) and that the Guarantee fund and Long-term employment benefit fund contributions are paid by the majority of employers within those sectors, these contributions are included in the model.
4. Universal cash transfers
4.1. Transfers related to marital status
None.
4.2. Transfers for dependent children
Child benefits in Lithuania depend on the age and number of children as well as the size of income of the family. In 2018 a non means-tested universal child benefit was introduced for all families raising children up to 18 years of age. Additional child benefit was granted if family’s income per person per year did not exceed EUR 2 196 for families with up to two children. For families with three or more children the additional child benefit is paid regardless of the amount of family income. When families complied with all requirements established in the law, the size of the child benefit was as follows:
5. Main changes in tax/benefit system since 2000
5.1. Tax system
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In 2000 the 3rd pillar private pension funds were introduced, allowing employees to voluntarily choose to accumulate for additional pension by taking part in the 3rd pillar private pension funds or negotiate it with employer as part of employment contract. Contributions to such funds are financed by employees themselves, if they chose to take part in pension scheme voluntarily or by the employer on behalf of the employee.
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In 2003 a possibility to deduct certain expenses from taxable annual income incurred by a resident of Lithuania was introduced.
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In 2004 the 2nd pillar pension system was introduced, allowing voluntary participation in the pension accumulation system which consists of a share of social security contributions paid by the employer, transferred to the pension fund on behalf of the employee.
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The personal income tax rate was lowered gradually from 33% to 27% as of 1 July 2006, then further to 24% in 2008 and again to 15% in 2009.
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In 2009 employee health insurance contributions were introduced together with a lower personal income tax rate.
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In 2009 a flat tax-exempt amount was replaced with a regressive tax exempt formula, gradually diminishing the tax-exempt amount at some level of income, therefore introducing an element of progressivity into taxation of wages.
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In 2014 the 2nd pillar pension system was modified. A possibility to increase the size of the private pension contribution was introduced by allowing employees to contribute additionally from their own gross wage with an additional contribution from the State.
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In 2017 the deduction of expenses described in section 1.122. on life insurance and voluntary 3rd pillar pension funds savings tax reliefs were given a “ceiling” and apply only to insurance premium of up to a total of EUR 2 000 per year.
In 2018 the additional tax exempt amount (child allowance) was replaced by direct child benefits, which are paid without testing for family income.
In 2018 a minimum amount (“floor”) of state social insurance contributions was established. Employers calculate and pay employer’s share of state social insurance contributions from a base not lower than MMS. As of 1 July 2018 employers must pay not only the employer’s share, but also the employee’s share of social insurance contributions from a base not lower than MMS.
5.2. Benefit system
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Between 2000 and June 2004 the child benefits were paid for all children up to 3 years of age, provided that none of the parents received maternity (paternity) benefits. Families with 3 or more children, below a set threshold of income per family member, were given more generous benefits for children up to 3 years of age, as well as benefits for children from 3 years to 16 years of age.
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Between July 2004 and 2008 the child benefits were paid without testing family income. The range of the age of children for which the benefits were paid depended on the size of the family. Different age ranges were applied for families with three or more children (the top of the range remained 18 years throughout the period) and families with up to two children (the top of the age range was gradually increased from 7 years to 9 years in 2006, from 9 years to 12 years in 2007 and from 12 years to 18 years in 2008).
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In 2009 testing of family income was introduced for families with up to two children above 3 years of age.
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In 2010 the testing for the fact and the size of the maternity (paternity) benefit was introduced for children up to 2 years of age and testing of family income was extended to all children above 2 years of age.
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Between 2012 and 2016 testing of family income applied to all children and only in families with three or more children the child benefit was paid for children over 7 years of age.
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In 2017 testing of family income was abolished for families with three or more children regarding child benefits. Moreover, families with up to two children under 7 years of age were included in the means-tested child benefit scheme.
In 2018 a universal child benefit replaced the abolished tax exempt amount for children.
6. Memorandum items
6.1. Average gross annual wage earnings calculation
The average gross wage is estimated by the Statistics Lithuania. For the purpose of this exercise the average annual earnings equal twelve average monthly gross wages in the industry sectors B–N by NACE Rev.2 (private sector, including individual enterprises). The gross wage is monetary remuneration, which includes the basic wage, additional pays, overtime, compensations calculated for annual and special leave and payment for idle time.
6.2. Employer contributions to private pension and health schemes
2nd pillar private pension funds. Employees can voluntarily choose to participate in the pension accumulation system which in 2018 consists of three types of contributions to the pension fund: (1) a share of social security contributions paid by the employer is transferred to the pension fund on behalf of the employee (2 p.p. from the total contribution paid by the employer); (2) an additional contribution of 2% deducted from the employee’s gross wage to the pension fund; (3) another 2% of the Lithuanian average gross wage is transferred by the State. In total, if an employee chooses to participate in the pension accumulation system, roughly 6% (2+2+2) of gross wage is accumulated in the pension fund. However, the supplementary part of a social insurance pension will decrease for the period of participation in the accumulation of pensions depending on the amount of contributions paid.
3rd pillar private pension funds. Employees can voluntarily choose to accumulate for additional pension by taking part in the 3rd pillar private pension funds or negotiate it with employer as part of employment contract. Contributions to such funds are financed by employees themselves, if they chose to take part in pension scheme voluntarily or by the employer on behalf of the employee. Personal income tax relief related to the 3rd pillar contributions are applied (see section 1.1.2.2).
Additional voluntary health insurance. Employees can voluntarily choose to additionally insure their health for services and medicines that are not covered under the mandatory health insurance scheme. Contributions to such insurance schemes are financed by employees themselves and / or third parties on behalf of the employee (employer, family members, etc.). Personal income tax relief related to the contributions paid by the employers are applied (see section 1.1.2.1).
2018 Tax equations
The equations for the Lithuanian system are mostly on an individual basis. But child benefit is only calculated once.
The functions which are used in the equations (Positive, MIN, 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.