Chile
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.
Chile’s national currency is the peso (CLP). For 2023, the average exchange rate was CLP 806.57 to USD 11. That same year, the average worker in Chile earned CLP 13 232 535 (country estimate2).
Taxes allowances and tax thresholds for the personal income tax system and upper earnings limits for social security contributions are determined using and expressed in CPI-indexed units. As of June 16, 2023, the following are the provisional3 yearly currency values applied to these units:
1.1. Central/federal government income taxes
1.1.2. Tax allowances and credits
1.1.2.1. Standard tax reliefs
Education tax credit: Parents with children attending preschool, primary, special or secondary education, with a total annual taxable income (both parents) of up to CLP 29 364 643 (UF 792), are entitled to a tax credit of CLP 163 137 (UF 4.4) per child, for expenses related to education. Children shall have a minimal school attendance of 85% and the school must be recognized by the State. This tax credit can be claimed by both parents, or only by one of them.
Relief for social security contributions: Employee’s compulsory social insurance contributions are deductible for income tax purposes regardless of whether they are paid to government or private health insurers. (See section 2.1 below).
1.1.2.2. Main non-standard tax reliefs
Voluntary contributions and APV (Voluntary Pension Fund Savings): Voluntary contributions to pension funds and voluntary pension savings fund (APV) may be deducted from taxable income, with an annual upper limit of CLP 22 245 942 (UF 600).
Mortgage Interest: Taxpayers whose annual income falls below CLP 68 392 080 (UTA 90) may deduct from their taxable income 100% of interest paid within a year for mortgage loans. This percentage is reduced in the case of taxpayers with higher incomes up to CLP 113 986 800 (UTA 150). This relief cannot be granted along-side the DFL2 Housing Mortgage Loan Payments benefit and cannot exceed CLP 6 079 296 (UTA 8) per annum.
1.1.3. Tax schedule
Tax rates are applied on monthly income and these taxes are retained and paid by employers. In order to estimate taxes, tax rates are applied on an annual basis, on the annual average income (starting of 1 January 2021, the maximum marginal tax rate was raised from 35% to 40%, and the number of tax brackets was augmented from seven to eight):
As of 1 January 2017, the President of the Republic, Ministers, Undersecretaries, Senators and Deputies have tax thresholds and rates applicable specifically to their income, if it is higher than 150 UTA:
2.1. Employees’ contributions
Employees have mandatorily to contribute 7% of their income to a health insurance plan subject to an upper earnings limit of CLP 35 439 882 (UF 979.2). They are free to choose whether to pay into a government-managed plan or alternatively to a private insurer4 (Isapres). The public insurance is based on a joint system that, in general, operates on an equal basis for all its beneficiaries, irrespective of the risk and the amount of the individual contribution. Its financing is partly covered by the contributions and partly by way of a government subsidy. Premiums paid to the plans offered by Isapres are based on the contributors’ individual risk and these plans are exclusively financed with the employees’ contributions. Public insurance contributions are included in the modelling as the majority of employees pay into plans managed by the government sector.
Employee social security contributions in respect of pensions and unemployment are not classified as taxes in this report; though they are included in modelling as deductions for income tax.
The mandatory contributions to pension funds and unemployment insurance plans are not classified as taxes, since the payments are made to private institutions. In 1980, the public social security system was replaced with a privately managed individual capitalisation system. This system is obligatory to all employees who have joined the labour force since 1983 and free-lance workers since 2012, and of a voluntary nature to all contributing to the former system. The contributions to the old government operated pension fund system are not included in the modelling because they relate to a minority of employees and the system will eventually disappear once the contributions and related benefit payments to those individuals remaining in it have ceased.
The modelling allows that the contributions to pension funds and unemployment insurance managed by private institutions are deducted from gross income. In the case of their pension funds, these payments amount to 10% of their gross income, with an upper earnings limit of 35 439 882 (UF 979.2). Added to that there is an amount that varies depending on the managing company that covers the management of each pension fund account.5 The monthly unemployment insurance premium is 0.6% of the employee’s gross income, with an upper earnings limit of CLP 53 246 691 (UF 1 471.2). Employees do not pay the monthly unemployment insurance premium when they have a fixed-term contract or after 11 years of labour relationship.
There are also mandatory contributions to managed funds by members of the police force and the army which are classified as taxes but are not included in the modelling as they relate to a minority of the overall workforce.
If the employee has a high risk job, that person has to make an additional contribution of 2% (heavy work) or 1% (less heavy work) of the gross income with an upper earnings limit of CLP 35 439 882 (UF 979.2) to the pension fund account.
The pension and unemployment contributions are not included in the Taxing Wages calculations, as they are not considered as taxes in the report. However, information on “non-tax compulsory payments” as well as “compulsory payment indicators” is included in the OECD Tax Database, which is accessible at www.oecd.org/ctp/tax-database.htm.
2.2. Employers’ contributions
There are five categories of employer social security contribution, none of which are classified as tax revenues in this report.
Employers make mandatory payments of 0.90% of their employees’ gross income for an occupational accident and disease insurance policy subject to an upper earnings limit. For the majority of employees, the payments are made to employers’ associations of labour security which are private non-profit institutions. Those remaining are made to the Social Security Regularisation Unit (ISL). Although this latter organisation is controlled by the government, the funds are invested on the private institutions market. The employers also pay an additional contribution which depends on the activity and risk associated to the enterprise (it cannot exceed 3.4% of the employees’ gross earnings). This additional contribution could be reduced, down to 0%, depending on the safety measures the employer implements in the enterprise. If health and safety conditions at work are not satisfactory, this additional contribution could be applied with a surcharge of up to 100%.
Employers shall make a mandatory contribution of 0.03% of the employee’ gross income to a fund which finances insurance coverage for working parents of children aged 1 to 15, or ages 1-18, whichever applies, that have a serious health condition, so that the parents can take a leave of absence from their work in order to accompany and take care of them; therefore, during this period the parents shall have the right to assistance financed by said fund (in Spanish, “Fondo SANNA”) that will replace, in total or partially, their monthly earnings. The collection of this contribution is initially delegated to the ISL and to the employers’ association of labour security.
Employers make payments of 2.4% of each employee’s income (0.8% after 11 years of labour relationship and 3% for fixed-term contracts) with an upper earnings limit of CLP 4 437 224 (UF 122.6 monthly) to finance unemployment insurance. These funds are managed privately.
Employers are required to pay a disability insurance of 1.58% (estimated average for 2023) of the employees’ gross income, with an upper earnings limit of CLP 35 322 339 (UF 979.2), collected by the pension fund manager, and managed by an insurance company.
If the employee has a high-risk job, the employer has to pay 2% (heavy work) or 1% (less heavy work) of the employee’s gross income, with an upper earnings limit of CLP 35 439 882 (UF 979.2) to the pension fund account.
Employers must purchase an individual Covid-19 insurance for private-sector employees working on-site. The price defined in the model amounts up to CLP 5 3006.
Since 2020, a minimum wage bonus has been stablished to ensure an income floor for every employee working under a Labour Code regulated contract, with a standard weekly schedule between 30 and 45 hours of work and a gross wage under a specific threshold. In addition, the beneficiary must rank within the 90th percentile of the Social Household Registry7 (in Spanish, Registro Social de Hogares).
For 2023, the Minimum Guaranteed Income required a gross wage under CLP 497 272 ensuring a net income of not less than CLP 379 793.
Another important social benefit corresponds to the “Family Allowance” which consists in a monthly payment available to any retirement pensioner or employees paying social security contributions. The specific amount will be directly determined by the income of the beneficiary and the number of dependent family members within the household.
The following table contains an annual estimation of the different payments by dependant house member and the corresponding income bracket of the beneficiary, applicable in 2023.
As a definition, for every cash transfer that can only be paid to one of the spouses per household and, where both individuals are working, the modelling assumes that the benefit is assigned to the member with the lower earnings.
Formerly known as “March Bonus”, the Permanent Family Contribution is an additional payment received by low-income families already participating in other social programs, among them, the Family Allowance. For this segment of beneficiaries, the Permanent Family Contribution consist of a yearly payment for each dependent household member equivalent to CLP 59 452.
In this latest version of the report, an additional universal cash transfer is modelled. The Electronic Family Wallet consists of a fixed monthly payment of CLP 13 500 per dependent household member. Similarly to the Permanent Family Contribution, the Electronic Wallet is automatically available to any individual receiving the family allowance
3.1. Marital status-related transfers
As described in the previous section, the “Family Allowance” is a social benefit paid in accordance with the income and the dependant family members of the beneficiary of each household. This definition for dependant family member can include spouses when their income is below 50% of the minimum legal wage (for 2023, this threshold is estimated to be around CLP 2 580 000 yearly).
3.2. Transfers related to dependent children
For children, the criteria that defines a dependent household member is somewhat broader than for spouses. The following cases can be identified as the most common:
4.1. Changes to labour taxation due to the COVID pandemic in 2020 and 2021
The Employment Protection Law No. 21,227/2020, in which the employer, under certain circumstances, puts the contract on hold, keeps paying the SSC, and employees can get part of their wages through the unemployment insurance fund ended in October 2021.
Direct cash transfers regarding COVID pandemic were temporary and ended in 2021, so they are reversed since the 2022 version of the TW model
5.1. Identification of an average worker
The source of information is a survey conducted by the National Statistics Institute (INE) to determine the Salary and Labour Cost Index. This nationwide survey is carried out on a monthly sample and gathers information on salaries and labour costs. It applies to companies with at least 5-worker payrolls grouped in accordance with ISIC4.CL 20128, covering workers in industry sectors B to R9.
The average gross earning was obtained by multiplying the average hourly wage by the average number of hours worked. It covers both full and part-time workers.
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.
Notes
← 1. Value up to 16 June 2023
← 2. Estimated using information of monthly earnings and working hours available up to March 2023.
← 3. As for the UTM and the UTA, the values correspond directly to the actual figure for both units as of July. For the UF, an estimate of the average annual value is used. This figure is obtained by assuming a monthly growth from July to December equivalent to its effective average monthly growth between February and June 2023.
← 4. Enrolment in the private health system by December 2021 amounted to 13.95% of all main contributors (17,94% of the beneficiaries).
← 5. Average cost in 2022 was 1.15% of gross income.
← 6. SSC indicators reported by Previred for 2023.
← 7. The Social Household Registry is a national information system designed to support the selection process of beneficiaries for a wide base of social programs and cash transfers. This ranking is constructed from data available within government and additional input provided by individuals.
← 8. ISIC4.CL 2012 is a Chilean classifier of economic activities, based on ISIC Rev.4.
← 9. O (8422) “Defense Activities” and O (8423) “Public order and safety activities” are not included.