Income Tax Decreases, Social Payment Increases: Changes in Employee Taxes in 2023

Starting from 2023, the income tax rate for registered employees in Armenia is decreasing. At the same time, the rate of social payments directed to funded pension funds is increasing. These changes are part of amendments adopted in 2019, with 2023 marking the last year for these tax rate alterations. This was reported by 'Hetq.'

The income tax has been set at 20% for registered employees in Armenia, meaning that from this year, they will pay 20% of their monthly salary. This represents a decrease of 1 percentage point compared to 2022. According to the amendments established in 2019, the income tax was set to gradually reach 20% by 2023. These changes are governed by the 'Republic of Armenia Tax Code.'

Armenia operates a flat income tax system, meaning that all registered employees pay income tax at the same rate.

Starting this year, both the state and citizens are expected to accumulate equal amounts for the pension of the citizen. Registered employees accumulate funds from their monthly salary, which are directed to their pension accounts. Employees in Armenia are mandatory participants in the funded pension system if they were born in or after 1974. Older individuals can join the system voluntarily.

The amounts deducted from salaries for future pensions are considered social contributions. From 2023, the social payment rate will become 5% for citizens whose 'dirty' salary does not exceed 500,000 drams per month. The state also adds another 5% based on the worker's salary to the citizen's pension account. Thus, the level of participation from both the state and the citizen is equalized this year.

The logic of the mandatory funded pension system is that 10% of a worker's salary should be accumulated as a future pension. A portion of this 10% is paid by the worker, while the other part is covered by the state. Up until this year, the citizen’s contribution was smaller, specifically at 4.5% in 2022. However, while the income tax decreased, the social payment has increased as well. This is also part of the tax changes adopted four years ago.

Regarding the social payment rates for mandatory pension contributions for salaries up to 500,000 drams, the timeline has been as follows:

• From January 1, 2020: 2.5%
• From January 1, 2021: 3.5%
• From January 1, 2022: 4.5%
• From January 1, 2023: 5%

If a worker's salary exceeds 500,000 drams and falls within the range of 1,125,000 drams, the social payment from 2023 is calculated like this: the monthly payment from the state budget will be 25,000 drams (5% of 500,000 drams), and the remaining amount to complete 10% will be paid monthly by the participant.

For salaries above 1,125,000 drams, a fixed social payment of 87,500 drams is levied. The figure of 1,125,000 drams is not an arbitrary threshold; it is the maximum base income threshold, amounting to 15 times the minimum wage, which is legally set at 75,000 drams.

If the government does not decide to introduce new tax changes, the rates for income tax and social payments will remain unchanged starting from 2024, as 2023 is the last year for these amendments, according to the 'Republic of Armenia Tax Code.'

In addition to income tax and social payments, registered employees in Armenia also pay a stamp duty monthly. These funds are directed to the 'Military Personnel Insurance Fund.' The stamp duty rates remain the same as in 2022.

Thus, suppose a citizen receives a monthly 'dirty' salary of 300,000 drams and is a participant in the funded pension system. In that case, they will be taxed 20% on income tax, amounting to 60,000 drams, a 5% social payment of 15,000 drams, and a stamp duty of 5,500 drams. As a result, the employee will pay a total of 80,500 drams in taxes per month, leaving them with a net salary of 219,500 drams.

It is important to note that these rates and changes apply to registered employees. Different tax systems apply to individual entrepreneurs and legal entities.