Employee premium

What it means

The employee premium is a form of negative income tax for a low-paid employee: the state pays out part of the relief the employee could not use through the tax-free allowance. The entitlement is set out in the Income Tax Act.

It requires that the employee had only employment income during the year, worked at least six months, and earned at least the level derived from the minimum wage. Any other taxable income cancels the claim.

The premium differs from the tax-free allowance in being a payment rather than a relief. The allowance can reduce tax to zero at most, whereas the premium could be paid even to an employee who had paid nothing in payroll tax advances. That is why the Act ties it to strict conditions and any other taxable income cancels the claim.

How it works in practice

The premium is claimed after the year ends, in the employer’s annual tax settlement or in a tax return, never monthly in the payslip. The employer pays it out and reduces its remittance of payroll tax advances by the same amount.

The formula has produced zero for years, though. As the minimum wage rose, the annual tax base of a full-time employee moved above the tax-free allowance and the calculation yields nothing. The institute stayed in the Act; in practice nobody is paid.

The lines for the premium are still on the annual settlement forms and in the annual payroll tax report. When employees ask about them, we explain that an empty box is not a payroll error. Each time the minimum wage or the allowance changes, we rerun the formula so as not to miss a year in which it would again yield a positive amount.

What to watch out for

The premium gets confused with the child tax bonus, and attention goes where nothing has been available for years. Someone who worked only part of the year is entitled to the whole annual allowance, and if they neither ask for the annual settlement by 15 February nor file a return, the overpaid advances stay with the state.

An employee with two jobs signs the declaration claiming the tax-free allowance with both employers at once. The relief then arrives twice every month, and after the year ends the employee has to file a return personally and pay the difference in one sum. Failing to file adds a penalty for non-filing on top.