North Macedonia increases social security contribution rates; temporarily freezes progressive personal tax

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Increase of social security contribution rates

Employees in North Macedonia have been witnessing a steady trend of increasing social security contribution rates in recent years. The Government is constantly trying to ensure more stable revenues to the Pension and Disability Insurance Fund of Macedonia and the Health Insurance Fund of Macedonia; two funds where most of the contributions are allocated. Hence, it was necessary to increase the rate of the rates for compulsory pension and disability insurance and the compulsory health insurance.

Based on the Law on Mandatory Social Insurance Contributions, the rates on which compulsory social security contributions are calculated and paid starting with the payment of the salary for January 2020 have been changed as follows:

• Increase from 18.4% to 18.8% for pension and disability insurance contribution
• Increase from 7.4% to 7.5% for health insurance contribution

With these amendments, the total mandatory social security contributions amount to 28% (27.5% in 2019, 27% in 2018). As reminder, mandatory contributions are deducted from the employee’s gross salary and paid to the state by the employer, concurrently with the payment of net salaries and other taxes.

Increase of monthly Personal Income Tax exemption

Starting with the payment of the salary for January 2020, a new tax deduction (used for the monthly calculation of personal income tax from employment) will be applicable.

The tax deduction for payment of income tax due from salaries and pensions will amount to MKD 8,228. In 2019, this amount equaled MKD 8,000 while in 2018 it was 7,531.

Temporary roll-back of progressive income tax

Following 10 years of applying a flat 10% personal income tax rate, the Ministry of Finance abolished the approach and introduced a Progressive Taxation Law, which entered into force on 1 January 2019, much to the discontent of high-salaried sectors. The progressive tax defined 2 tax brackets: 10% tax applied on monthly income tax base up to MKD 90,000 (about EUR 1,500) and a 18% tax applicable on any monthly income tax base exceeding MKD 90,000.

This approach was meant to create a fair tax system but upon reevaluation of its results, the Ministry of Finance decided to temporarily freeze its application. The progressive individual income tax rates, therefore, will be suspended for the next 3 years. As a result, for the period 01 January 2020 – 31 December 2022, the tax on income from employment, independent activities, copyright, income from the sale of own agricultural products, income from industrial property rights, lease and sublease, capital, games of chance, insurance and other income will be levied at a rate of 10%.

Given the wide range of changes outlined above and the varying impact they have on payroll calculations in 2020, we advise companies in North Macedonia to seek professional payroll assistance in analyzing their employment costs and the impact these amendments have on their employee’s gross to net ratios.