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 2020, EUR 0.88 was equal to USD 1. In 2020, the average worker in Lithuania was expected to earn EUR 16 426 (Secretariat estimate).
1.1. Central government income tax
1.1.2. Tax allowances
1.1.2.1. Standard tax reliefs
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 2020 the annual tax-exempt amount is EUR 4800 for individuals whose annual income does not exceed twelve minimum monthly wages effective on 1 January of a respective calendar year (EUR 7 284 in 2020). For others, the annual tax-exempt amount is estimated using the following formula:
4 800– 0.19 x (annual income – twelve minimum monthly wages effective on 1 January of a respective calendar year).
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 32 547.
An allowance for disadvantaged is applied as follows: in 2020 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 7 740The 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 7 200. The tax allowance for disadvantaged is not included in the Taxing Wages calculations.
1.1.2.2. Non – standard tax reliefs applicable to income from employment
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).
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):
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.
2nd pillar pension contributions, paid by employees, exceeding 3% of taxable wage related income.
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.
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.
Payments for repairs of housing (except renovation of multi-apartments), repairs of passenger cars and childcare services (made for one’s own benefit or for the benefit of one’s spouse).
The deduction of expenses described above on life insurance and pension contributions applies only to expenses of up to a total of EUR 1 500 per year. The deduction of expenses for studies is unlimited, while expenses for services on housing / passenger car repairs and child care services are limited to EUR 2 000 per year.
1.1.3. Tax schedule
A two-bracket progressive personal income tax rate system is applied on taxable wage related income: 20% applies for income equal to or below the threshold of 84 average wages per year (EUR 104 278 in 2020), 32% applies for income above the threshold. The tax is withheld by the employer at 20% rate from employee’s wage and paid up to two times a month. The 32% rate is applied and the difference between 20% rate and 32% rate is paid by the employee once per year, when filing the annual income tax return.
The compulsory social security insurance system consists of the following types of social security contributions:
. The share of the wage above the “ceiling” is not subject to social security contributions (except Health insurance contributions). In 2020, the ceiling is set at 84 average wages per year (AW);; as of 2021 - to 60 AW.
The AW applied to calculate the social security contribution base is approved by the law of Approval on Budget Indicators of the State Social Insurance Fund for the relevant year. It is the average gross monthly earnings (including salary data for the sole proprietorships) published by the Statistics of Lithuania of Q3 and Q4 for the year before the previous year and Q1 and Q2 for the previous year.
2.1. Employees’ contributions
Since 1 January 2020, the rate of the employee’s social security contributions is 19.5%, as follows:
Employees pay social security contributions from 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). The assessment period is the calendar month.
2.2. Employers’ contributions
Since 1 January 2020, the overall rate of the social security contributions of the employer’s is 1.47%, as follows:
unemployment insurance – 1.31% for termless employment contracts and 2.03% for fixed-term employment contracts;
insurance from accidents at work and occupational diseases – the overall rate is 0.16% (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:
A minimum amount (“floor”) of social security contributions is applied. Employers must calculate and pay employer’s and employee’s share of social security contributions from a base not lower than minimum monthly salary (MMS), which in 2020 is EUR 607. Exceptions apply in cases where:
2.3. Payroll tax
Employers pay 0.16% 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 0.16 % 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.
The “ceiling”, as described in the chapter 2. Compulsory social security insurance system”, is also applied on the payroll tax.
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, trade unions, religious communities and societies (exempt from Guarantee fund contributions). Given that the model covers the private sector only (sectors B to N by ISIC Rev.4) 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.
3.2. 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 and over, if he / she is studying under the general education curriculum, but not longer, until he / she reaches the age of 21. In 2020, the size of the universal child benefit is EUR 720.72 per child per year. Additional child benefit (EUR 482.04per child per year, which is paid on top of the universal benefit) is granted if family’s income per person per year did not exceed EUR 3 000 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.
4.1. Tax system
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.
In 2003 a possibility to deduct certain expenses from taxable annual income incurred by a resident of Lithuania was introduced.
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.
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.
In 2009 employee health insurance contributions were introduced together with a lower personal income tax rate.
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.
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.
In 2017 the deduction of expenses described in 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 social security contributions was established. Employers calculate and pay employer’s share of social security 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 security contributions from a base not lower than MMS.
In 2019 a labour taxation reform was introduced. Most of the employer's SSC (a total of 28.9 p.p.) were shifted to the employee. The overall employer’s SSC rate in 2018 was 30,5%, an aggregated of:
Starting from 1 January 2019 pension insurance, health insurance, sickness insurance and maternity insurance were shifted to the employee side (22,3%+3%+1,4%+2,2%=28,9%)
This resulted in a gross salary increase by 28.9% (enforced by law), as well as recalculation of SSC, personal income tax and payroll tax rates accordingly to neutralize the shift. Moreover, a share of SSC, covering the general part of pension, was shifted to personal income tax to ensure a sustainable financing source for financing the general part of pension from the State budget. Finally, personal income tax and SSC rates were reduced by a total of 1.55 p.p. (in the new taxation system) to ensure that take home pay does not decrease in case a person decides to participate in the 2nd pillar pension system after the 2019 reform (which includes employee's contribution).
In 2019, a two-bracket progressive taxation for labour income was introduced. The first bracket is taxed at 20%, while the second bracket – at 27% personal income tax rate (above the threshold of 120 average wages per year).
In 2019, the ceiling for both employee’s and employer’s SSC (excluding health insurance contributions) and payroll taxes (contributions to the Guarantee fund and Long-term employment benefit fund) was introduced. It is applicable for the annual income above 120 average wages
In 2020 the tax rate for second bracket was increased from 27% to 32% personal income tax rate and the threshold above which 32% rate is applied was reduced from 120 to 84 average wages per year.
In 2020 the ceiling for both employee’s and employer’s SSC (excluding health insurance contributions) and payroll taxes was reduced from 120 to 84 average wages per year.
4.2. Benefit system
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 three 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.
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).
In 2009, testing of family income was introduced for families with up to two children above 3 years of age.
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.
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.
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. Universal child benefit is paid for every child from birth to the age of 18 years and over, if he / she is studying under the general education curriculum, but not longer, until he / she reaches the age of 21. Large and low-income families continue receiving the same level of additional child benefits (on top of the universal child benefits), as per legal regulation applicable since 2017.
4.3. Changes to labour taxation and benefit system due to the covid-19 pandemic
In relation to the COVID-19 pandemic, the Lithuanian Government and the tax authorities decided to apply certain personal income tax and social security contribution related measures to assist tax payers with their ongoing obligations.
Lithuanian tax authorities have published a list of tax payers which were directly hit and experienced adverse effects of COVID-19 pandemic. These tax payers are automatically subject to certain reliefs and the following fiscal measures apply to the listed entrepreneurs:
Recovery of unpaid taxes is suspended. The State tax inspectorate would not start tax recovery if these companies have tax debts arising from a declaration filed on 16 March or later;
Accumulated unpaid taxes have to be paid within two months from the end of the emergency situation. Companies that cannot pay accumulated taxes within the set deadline can apply to the State tax inspectorate for postponement of tax payment by concluding a tax credit agreement.
No interest will apply for such tax credit agreement.
Taxpayers on the COVID-19 list will be subject to similar measures to facilitate the payments of social security contributions. However, the two-month period for delayed social security contribution payments is calculated from the end of the quarantine (not from the end of the emergency situation, as is the case for personal income tax).
Taxpayers not on the COVID-19 list, but which have also experienced negative consequences of COVID-19, may apply to the tax authorities for the reliefs, as well as for conclusion of a tax credit agreement.
The annual tax-exempt amount for the fiscal year 2020 was increased from EUR 4200 (as budgeted for 2020 before COVID-19) to EUR 4800 for individuals whose annual income does not exceed twelve minimum monthly wages effective on 1 January 2020 (EUR 7 284 in 2020). For others, the annual tax-exempt amount is estimated using the following formula:
4 800– 0.19 x (annual income – twelve minimum monthly wages effective on 1 January of a respective calendar year).
One-off child benefit to reduce the effects related with the COVID-19 pandemics was approved by the Lithuanian parliament. Low-income families with up to two children and families with three or more children, as well as families raising children with disabilities, are entitled to one-off payment of 200 euros per child. Other families with children are entitled to one-off payment of 120 euros per child.
5.1. 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 ISIC Rev.4 (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.
5.2. Employer contributions to private pension and health schemes
2nd pillar private pension funds. Between 2004 and 2018, employees could voluntarily choose to participate in the pension accumulation system which in 2018 consisted of three types of contributions to the pension fund: (1) a share of social security contributions paid by the employer was 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 was 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 was 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. From 2019 all persons at age below 40, insured by social insurance, are enrolled in the 2nd pillar system with a possibility to opt-out. The procedure of auto-enrolment will be repeated every 3 years until the person reaches the age of 40. Pension accumulation system consists of two types of contributions to the private pension fund: (1) employee’s contribution – 3% deducted from the employee’s gross wage; (2) State’s contribution – 1.5% of the Lithuanian average gross wage is transferred by the State on behalf of the employee. Therefore, the overall contribution to the private 2nd pillar pension funds is 4.5%, which corresponds to 6% (2+2+2) applicable before the tax reform of 2019.
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 1.1.2.2).
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.