Taxation of earned income
Finnish taxation is based on a schedular system, in which earned income and capital income are taxed separately. Earned income includes
- the proportion of entrepreneurial income defined as earned income
- pension income
- other taxable welfare benefits.
Based on gross income and the deductions thereof, taxable income is defined separately in both state and municipal taxation. Each type of earned income is subject to tax, the level of which is based on the type of income, tax rates, and additional charges comparable to taxation.
Earned income taxes and payments
State income tax
Income under state taxation is subject to progressive state income tax. The level of tax is based on the progressive state income tax scale.
Income under municipal taxation is subject to municipal income tax, the level of which is based on the municipal tax rate. Each municipality is responsible for annually determining their respective tax rates. In 2016, the municipal tax rates range between 16.50% and 22.50%. The average municipal tax rate is 19.87%.
Members of the Evangelical Lutheran Church and the Orthodox Church are subject to church tax. Each parish is responsible for annually determining their respective tax rates. In 2016, the church tax rates range between 1.00% and 2.00%.
Health insurance contribution
The health insurance contribution is paid to the Social Insurance Institution of Finland Kela. These contributions consist of the medical care insurance payment and the earned income insurance payment.
The medical care insurance payment in 2016 is 1.30% of the earned income and 1.47% of other income (such as pension and benefits). The tax base for the medical care insurance payment is the basis for deductions concerning municipal taxation. The earned income insurance payment in 2016 consists of 0.87% of the taxable earned income. The contribution payment for individuals insured under the Self-Employed Persons Pension Act (YEL insurance) is paid from their earned income. The earned income of entrepreneurs is subject to an increased contribution. The increase is 0.13 percentage points, meaning that the total contribution amounts to 0.95% of their earned income. The Ministry of Social Affairs and Health is responsible for the legislation concerning health insurance premiums.
Unemployment insurance premiums and pension contributions are paid from earned income. In 2016, the unemployment insurance premium is set at 1.15% and the pension contribution at 5.7% of earned income. The pension contribution is set at 7.2% of earned income for individuals over the age of 53. Based on gross income, these payments are deductible and not included in the withholding tax rate determined in the tax card. The payments can be deducted from income tax.