In the new issue of the IPF Notes, Ivica Urban analyses how the proposed legislative amendments, which de facto put an end to the taxation of pensions, were preceded by several years of strong growth in the tax burden of taxpayers in the annual personal income tax assessment. This growth was caused by the failure to adjust tax parameters to the growth of incomes and consumer prices. Between 2017 and 2025, the basic personal allowance increased by only 19%, while the average salary increased by 96% and the average current pension value by 69%. With incomes expected to keep growing in 2026 and 2027 and the personal allowance unchanged at EUR 600 per month, an increasing number of pensioners will cross that threshold and fall into the “tax scissors”.

Pension income has been given preferential tax treatment since 2017, and under the new proposal the tax reduction would increase from 50% to 100% for the part of the tax base that relates to the pension and is taxed at the lower rate. The higher rate applies to a tax base above EUR 60,000 per year, i.e. EUR 5,000 per month, so only taxpayers whose tax base exceeds this amount will pay tax on their pension income. Since there are very few such pensioners, in fact we can say that pensions will no longer be subject to taxation.

The analysis shows that increasing the basic personal allowance to EUR 810 for all taxpayers would reduce the projected average tax rate in 2027 from 9% to 7.3%, the level at which it stood in 2017, without necessity to almost entirely end the taxation of one income category. Since the failure to adjust the personal allowance affects taxpayers with lower incomes most, it is more appropriate to adjust the allowance regularly in line with price and income growth than to address the problem by reducing tax rates, where the benefit increases with income.

The paper is an outcome of the project Social protection, taxation and social welfare in Croatia financed by the European Union (NextGenerationEU).