Irpef rates and calculation: from brackets to deductions, here’s how the measure works – INSTRUCTIONS

Revenue Agency press release of 18 February 2022:

New IRPEF and abolition of IRAP for natural persons carrying out commercial activities and arts and professions. Clarifications from the Revenue in a circular

Tax withholding agents who were unable for technical reasons to apply the new rules on Irpef taxation in time will be able to comply by April, making an adjustment for the first three months of 2022. This is one of the clarifications contained in circular no. 4/E of the Revenue Agency, which provides information on the news relating to the taxation of Irpef and the exclusion from Irap for natural persons carrying out commercial activities, arts and professions, as provided for by the latest Budget Law (L . no. 234/2021). The practical document focuses on changes to tax rates and brackets, on the remodulation of deductions from employee and similar employment, from pensions, from self-employment and other income, as well as reporting some examples and simulations of practical cases.

How Irpef changes – The new Irpef, as modified by the 2022 Budget Law, is remodulated on 4 rates instead of 5 (23%, 25%, 35%, 43%). We therefore go from 27% to 25% for the second rate relating to incomes from 15,001 to 28,000 euros, from 38% to 35% for those up to 50 thousand euros, while higher incomes are taxed at 43%, with the abolition of the old rate of 41%.
The circular provides useful information on the obligations to be borne by tax withholding agents and taxpayers, even without a substitute. Those who have not managed to adapt their payroll processing software in time, for example, will be able to apply the regulatory changes by April 2022, with an adjustment for the first three months of the year.

Subjects excluded from the application of IRAP – The practice document specifies that the subjects excluded from the application of IRAP include natural persons carrying out commercial activities with business income (art. 55 TUIR) resident in the territory of the State. Natural persons practicing arts and professions are also outside the scope of the tax (art. 53, paragraph 1 of the TUIR). However, natural persons practicing arts and professions in an associated form remain subject to IRAP.

The Irpef rates will change from 1 January 2022: the intention of the Legislator is to compress the brackets and reduce the rates of the medium-low brackets. But local authorities will have until March 31st to adapt the surcharges to the new 4-rate system.

In fact, the new IRPEF rates (and brackets), in force from 2022they should be the following:

1) from 0 to 15,000.00 euros: 23%;

2) from 15,00.01 to 28,000.00 euros: 25%;

3) from 28,000.01 to 50,000.00 euros: 35%;

4) from 50,000.01 euros onwards: 43%

Ultimately, the penultimate bracket stops at 50 thousand euros instead of 55 thousand euros, the 55 thousand – 75 thousand euro bracket currently taxed at 41% disappears and the two intermediate rates of 27% and 38% are reduced, respectively, to 25% and 35%.

The new rates therefore came into force on 1 January 2022, but local authorities will have until 31 March to adapt the surcharges to the new 4-rate system.

The average discount is 264 euros per year. But it takes time to adapt the pay slip software and the concrete effect will only arrive in March when there will also be the adjustment for the previous two months.

The old IRPEF tax systemprovided for the traditional rates for income brackets: these are 5 rates which correspond to as many income brackets and precisely:

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Average reduction of 264 euros for 27.8 million taxpayers

The tax reform which will come into force in 2022 will lead to an average reduction in tax collection for 27.8 million taxpayers of 264 euros but the advantage will be greater for medium-high incomes, those between 42 thousand and 54 thousand, who will have to pay 765 euros less on average to the treasury. The calculation comes from the Parliamentary Budget Office which in a Flash study underlines that 14.1% of resources are concentrated in this wealthier segment which is equal to 3.3% of taxpayers. In fact, this is the audience that did not benefit from the so-called Renzi bonus (which was completely exhausted at 40 thousand euros of income) and partly benefited from the reduction of the rate from 38% to 35% (up to 50 thousand euros while between 50 thousand and 55 thousand goes directly to 43%). In fact, the study underlines, managers will have a tax reduction of 368 euros, more than double, in absolute terms, the average of workers, equal to 162 euros, while employees will have a tax cut of 266 euros.

The impact of the reform on individual taxpayers

The study analyzes the impact of the reform also looking not at individual taxpayers but at the family unit, clarifying that the 20% of the poorest families are “substantially excluded” from the benefits due to fiscal insufficiency. In practice, the 50% of households in the least favorable economic condition “benefit from approximately a quarter of the total resources (approximately 1.9 billion), while the richest 10% benefit from more than a fifth of the resources (1.6 billion)” . The 20% of families in a less favorable economic situation are effectively excluded from the scope of application of the Irpef due to the high level of minimum taxable incomes and are therefore not involved in the revision of the Irpef. “This implies – explains the PBO – that if future social policies want to further support the incomes of the poorest families they will have to rely on instruments other than Irpef, such as direct monetary transfers or negative tax mechanisms”. According to Upb estimates, the complex of interventions will lead to a reduction in the levy of around 264 average euros per capita (around one percent of disposable income) for 27.8 million taxpayers, equal to around two thirds of the total.

The overall burden once fully operational, estimated at 7.3 billion, does not differ significantly from the assessments reported in the Technical Report (around 7 billion). The tax change, however, is indifferent to over 14.5 million taxpayers while there is a tax increase for approximately 372,000 individuals, on average equal to 188 euros per capita, for a total of 70 million euros overall. But it should be remembered that there is a safeguard clause which concerns only those who had the Irpef bonus activated by Renzi, therefore with low incomes. Indeed, for incomes up to 15 thousand euros the Renzi bonus of 100 euros remainsThat it remains, at least in part, up to 28 thousand euros to avoid anyone losing out with the mix between new Irpef, deductions and absorption of the bonus.

Deductions according to income

In terms of overall burden, the redesign of the rates and brackets represents the predominant intervention which absorbs approximately 79% of the resources distributed (5.8 billion) while the remaining 21% (1.5 billion) is equally divided between the redesign from the deductions for employed work and deductions for pensioners and the self-employed. In front of one average tax reduction for individuals who have an advantage of 264 euros, for around half of them the benefit is less than 185 eurosWhile one taxpayer in 8 (12.5 percent) benefits for more than 500 euros.

For taxpayers with an income of less than 12,000 euros, the average benefit is significantly reduced due to the tax incompetence. The first two income classes, where approximately 36.9% of taxpayers are concentrated, benefit from approximately 6.7% of the total resources (approximately 500 million). The Uil underlines that the Upb estimates “disprove” the tax reform launched by the Government and confirm the union’s analysis “on the unfairness and ineffectiveness of the intervention”. “85% of workers and pensioners, states the confederal secretary Domenico Proietti – it only receives a few crumbs. Uil will continue its battle for a real tax cut for employees and pensioners and for an epochal turning point in the fight against tax evasion.”

The new system of deductions for work

The current structure of deductions for work remains in place, which are distinguished according to the “type” of work and, precisely:

– deductions for employed work;

– pension deductions;

– deductions for other types of income (self-employment, business, various incomes).

It is possible to summarize the new amounts as follows:

1) Deduction for employee income (art. 13, paragraph 1, letter a), b) and c) Presidential Decree no. 917/1986):

– for incomes over 28,000 euros and up to 50,000 euros: 1,910*((50,000-total income)/(50,000-28,000))

– for incomes over 50,000 euros: 0

The aforementioned amount increases by 65 euros for incomes from 25,000 euros to 35,000 euros.

2) Deduction for pension income (art. 13, paragraph 3, letter a), b) and c) Presidential Decree no. 917/1986):

– for incomes up to 8,500 euros: deduction equal to 1,955 euros (not less than 713 euros);

– for incomes over 8,500 euros and up to 28,000 euros: 700+(1,955-700)*((28,000-total income)/(28,000-8,500))

– for incomes over 28,000 euros and up to 50,000 euros: 700*((50,000-total income)/(50,000-28,000))

– for incomes over 50,000 euros: 0

The aforementioned amount increases by 50 euros for incomes from 25,000 euros to 29,000 euros.

3) Deduction for other income (art. 13, paragraph 5, letters a) and b) Presidential Decree no. 917/1986):

– for incomes up to 5,500 euros: deduction equal to 1,265 euros;

– for incomes over 5,500 euros and up to 28,000 euros: 500+(1,265-500)*((28,000-total income)/(28,000-5,500))

– for incomes over 28,000 euros and up to 50,000 euros: 500*((50,000-total income)/(50,000-28,000))

– for incomes over 50,000 euros: 0

The aforementioned amount increases by 50 euros for incomes from 11,000 euros to 17,000 euros.