Small Businesses to Feel the Impact of Pension Contributions

The government’s consolidation package plans to increase pension contributions for self-employed individuals starting next year. Each self-employed person will contribute an additional thousand Czech korun to the pension system annually, with further increases in the following two years. These measures will primarily affect small businesses, especially those used as secondary income sources.

According to the tax consulting firm V4 Group, if a self-employed person previously claimed a 60% flat-rate deduction and had a monthly income of 50,000 Czech korun (600,000 korun annually), their annual social security contribution would have been 35,328 korun. Under the same flat-rate deduction in 2024, the social security contribution would increase to 42,389 korun annually. In the given example, the monthly social security payments for the self-employed would increase by nearly 600 korun.

However, for self-employed individuals declaring an income of 20,000 korun per month, the difference in annual contributions to the social security system compared to those with a 50,000 koruna income would be minimal. Self-employed people with lower incomes will mainly feel the impact of the government’s measures.

Josef Jaroš, the chairman of the Association of Small and Medium-Sized Enterprises and Self-Employed Persons and a board member of the consulting company PKF Apogeo, stated that the increased contributions would affect those individuals who rely on self-employment as a means of additional income. This could lead to these small self-employed individuals shifting their activities solely to the “off-the-books” sector, avoiding any contributions altogether.

As part of the consolidation package, the government plans to gradually increase the minimum assessment base for social security contributions for self-employed persons from 25% to 40% of the average wage from 2024 to 2026. This increase will occur at a rate of five percentage points annually. The government aims to ensure that self-employed individuals have more dignified pensions.

Advisors from PKF Apogeo are currently assessing whether, under certain circumstances, it may be more advantageous to convert self-employment into a limited liability company. However, the government also intends to raise the contributions for legal entities from 19% to 21%.

While a 2% increase in corporate taxes may not significantly impact businesses, Jaroš emphasized that the increased contributions for self-employed individuals are a more complex issue.