The Finnish tax system is known for its transparency and efficiency, designed to support the country’s robust welfare state. Taxes in Finland are levied at both the national and municipal levels, encompassing income tax, corporate tax, value-added tax (VAT), and various other taxes. The progressive income tax structure ensures that higher earners contribute a larger percentage of their income, promoting social equity. Additionally, Finland’s tax system includes social security contributions, which fund essential services such as healthcare, education, and pensions. This comprehensive approach to taxation helps maintain high living standards and a well-functioning society.
Finland operates under a unique schedular tax system where earned income and capital income are taxed separately. In this article, we'll explore the details of how earned income is taxed, which includes wages, entrepreneurial income, pensions, and taxable welfare benefits. We'll also break down the various tax components—state, municipal, and other charges—that contribute to the total tax burden on individuals and provide a comprehensive guide on tax credits, deductions, and other aspects of Finland's taxation system.
1. What is Earned Income?: In the Finnish tax system, earned income includes the following:
a. Wages: Any form of salary or payment from employment.
b. Entrepreneurial Income: The portion of income defined as earned income for entrepreneurs.
c. Pension Income: Income received from pension payments.
d. Taxable Welfare Benefits: Includes unemployment benefits, sickness allowances, and parental allowances.
2. Taxation of Earned Income: Earned income is taxed under both state and municipal tax regimes, with additional charges such as health insurance contributions and church taxes for those who are members of certain religious organizations.
a. State Income Tax: The state income tax is progressive, meaning that as income increases, so does the tax rate. The tax brackets for 2024 are as follows:
i. Income up to €20,500: 0%
ii. €20,500 - €30,500: 12.64%
iii. €30,500 - €50,400: 19.00%
iv. €50,400 - €88,200: 30.25%
v. €88,200 - €150,000: 34.00%
vi. Income over €150,000: 42.00%
b. Municipal Tax: Municipal tax is levied at a flat rate, with each municipality determining its rate annually. In 2023, these rates ranged from 4.36% to 10.86%, with the average municipal tax rate being 7.38%. Municipal taxes are essential for funding local services, such as education and healthcare.
c. Church Tax: If you are a member of the Evangelical Lutheran Church or the Orthodox Church, you are subject to church tax. The rates range from 1.00% to 2.10%, depending on the parish.
3. Health Insurance Contributions: Health insurance contributions in Finland are twofold, covering both medical care insurance and earned income insurance.
a. Medical Care Insurance Payment:
i. 0.60% on earned income.
ii. 1.57% on pensions and other benefits.
b. Earned Income Insurance Payment:
i. 1.36% of taxable earned income.
For individuals insured under the Self-Employed Persons Pension Act (YEL), contributions are based on entrepreneurial income.
4. Wage-Related Payments: In addition to the state and municipal taxes, wage earners in Finland must also pay specific contributions:
a. Pension Contribution: In 2023, the pension contribution rate is 7.15% of earned income, increasing to 8.65% for individuals aged 53-62.
b. Unemployment Insurance Premium: In 2023, the premium rate is 1.4% of earned income.
These payments are deductible, meaning they reduce your taxable income.
5. Tax Deductions and Credits
Several deductions and tax credits are available to help reduce the overall tax burden.
a. Automatically Granted Deductions
Some deductions, such as the earned income allowance, are automatically applied and do not need to be separately claimed.
b. Earned Income Allowance: For income between €14,000 and €30,000, this allowance is calculated as follows:
Earned Income Allowance = 0.15 × Annual Income + 0.20 × (Annual Income − €14,000)
For example, if your annual income is €27,000, the allowance would be:
0.15 × €27,000 + 0.20 × (€27,000 − €14,000) = €6,650
However, the maximum allowance is capped at €3,570.
c. Commuting Expenses: If you travel to work, you can claim commuting expenses as a deduction. However, certain limits apply:
d. Threshold: In 2023, a personal liability threshold of €750 applies.
e. Maximum Deduction: The maximum deduction is €8,400 in 2023 and €7,000 in 2024.
If you were unemployed for part of the year, the threshold decreases by €70 (2023) or €80 (2024) for each full month of unemployment.
f. Child Support and Maintenance Obligations: If you pay child support for an underage child based on a court decision or maintenance agreement, you can claim a tax credit for maintenance obligation.
6. Social Security Contributions: In addition to taxes, individuals in Finland also contribute to the country’s social security system:
a. Pension Contribution: The pension contribution rate in 2023 is 7.15% (rising to 8.65% for individuals aged 53-62).
b. Unemployment Insurance Premium: Set at 1.4% in 2023.
These contributions are tax-deductible.
7. Tax Credit for Household Expenses: If you hire services such as cleaning, child care, or home renovations, you may be eligible for a household expenses tax credit. This credit directly reduces the amount of tax you owe. Eligible services can also be performed at holiday homes.
8. Special Considerations for Entrepreneurs: Entrepreneurs can deduct YEL insurance contributions from their taxable income if they are not already deducted in the company’s accounts. If no pension insurance is collected from wages, they can enter a nominal amount to avoid an automatic deduction.
9. Tax Credits for Students
a. Student Loan Compensation
Students who began higher education after 1 August 2014 and completed their degrees within the target time can receive a student loan compensation.
b. The compensation is a percentage of the outstanding loan amount, subject to certain conditions.
c. For example, if you have €10,000 in student loan debt, with a 30% compensation rate, you could receive €3,000 as a tax credit.
10. Social Security Payments by Employers
Employers in Finland are required to make contributions on behalf of their employees. These include:
a. Employer’s Health Insurance Contribution: 1.16% of earned income.
b. Earnings-Related Pension Insurance Contribution (TyEL): Employers must provide earnings-related pension insurance for employees aged 17-68, whose monthly pay exceeds the minimum threshold.
11. Additional Notes on Tax Filing: When filing taxes in Finland, individuals must ensure all relevant deductions and credits are applied correctly. This includes union membership fees, commuting expenses, and pension contributions. Failure to accurately account for these can result in overpayment or underpayment of taxes.
Conclusion: Finland's taxation system for earned income is comprehensive, balancing various components such as state and municipal taxes, health insurance contributions, and other social security payments. Understanding the various tax credits, deductions, and allowances can significantly reduce an individual's tax burden. By staying informed, Finnish taxpayers can ensure that they maximize the available deductions and credits while remaining compliant with the country's taxation laws.
References
a. Finnish Tax Administration: vero.fi
b. Social Insurance Contributions Finland: Finnish Tax Administration
