Government plans to raise personal income tax, minimum wage and non-taxable minimum from 2025

RIGA - As of next year, the government plans to up the personal income tax rate, set a fixed and higher non-taxable minimum, as well as raise the minimum wage, Finance Minister Arvils Aseradens (New Unity) said a news conference Friday.

The finance minister said that the tax changes provide for increasing income for around 95 percent the working population, or all those whose gross monthly wage is up to EUR 4,000, with the steepest increase for employees earning up to EUR 2,500 per month. 

According to the minimum wage algorithm, its size will be 45-50 percent of Latvia's average wage, with a tendency towards 50 percent. In 2025, the minimum wage is set at EUR 740, in 2026 at EUR 780, in 2027 at EUR 820 and in 2028 at EUR 860.

There are also plans to simplify the tax-free minimum, setting it at EUR 510 in 2025, EUR 550 in 2026 and EUR 570 in 2027. In 2028, too, the tax-free minimum is planned at EUR 570, but this could be increased from a budgetary point of view, Aseradens said. The minister added that the tax-free minimum should gradually go up to 80 percent of the minimum wage.

At the same time, a non-taxable minimum of EUR 650 is foreseen for pensioners from next year.

The agreement also provides for the introduction of two rates of personal income tax - a 25.5 percent rate on annual earnings of up to EUR 105,300, or EUR 8,775 per month, and a 33 percent rate on income above EUR 8,775 per month.

Currently, the graduated non-taxable minimum applies to a person's monthly income of up to EUR 1,800. Employers have long complained about the complexity of this system and the need to simplify it by switching to a fixed tax-free minimum that would be the same for all. As the amount of the non-taxable minimum will remain the same regardless of the size of the salary, people will have more money, even though the personal income tax rate will rise from 20 percent and 23 percent to 25.5 percent, Aseradens explained.

The agreement also provides for an additional income tax rate on earnings above EUR 200,000 per year, taking into account all income - wages, dividends, capital and other income. From 2027, such income could be subject to an addition 3 percent rate of personal income tax.

As a compensatory mechanism, a one percentage point transfer of contributions from the second tier to the first tier of pensions is foreseen.

Aseradens said that the proposed scenario of labor tax cuts would boost private consumption and investment, increasing gross domestic product (GDP) by 0.2-0.3 percent annually or by EUR 330 million over three years. At the same time, the changes would align Latvia's labor cost competitiveness with the other Baltic countries, which would leave businesses with more money for investment and would boost economic growth.

The Finance Ministry explains that, for example, the minimum wage for a worker without dependents would rise to EUR 740 per month next year. As the non-taxable minimum will be increased to EUR 510 a month, this person would income grow EUR 38 per month.

A teacher without dependents who receives EUR 1,526 per month would see their salary increase by EUR 34 per month in 2025. An employee earning EUR 1,600 a month with two dependents would receive EUR 63 more per month.

An IT professional with a monthly salary of EUR 2,000 and no dependents would receive a EUR 42 per month pay increase, while the increase for a professional with a salary of EUR 2,000 and two dependents would be EUR 69.

A manager on EUR 3,000 per month would receive a EUR 22 per month increase, while a professional on EUR 3,000 with two dependents would receive a EUR 50 per month increase.

The tax changes will increase the working parents' allowance to 75 percent (currently 50 percent) of the parental allowance granted.

An extension of the tax relief for collective agreements (mobility) to EUR 700 per year has also been proposed. 

The proposal also provides for the continued application of a reduced 12 percent value added tax (VAT) rate on fresh fruit, berries and vegetables typical of Latvia. The amounts of aid or subsidies received by farmers will not be subject to VAT.

In order to achieve the EU's climate neutrality objectives, it is proposed to review excise duties on fuel and oil products. It is also proposed to revise the tax rates on non-alcoholic beverages with a sugar content of up to eight grams, alcoholic beverages, beer and tobacco products in order to harmonize excise duty rates with the other Baltic countries.

It is also planned to review the rates of lottery tax, gambling tax, motor tax and natural resources tax.

To improve the competitiveness of the labour force in the region, the burden of labour taxes on low- and medium-wage workers should be further reduced, the Finance Ministry says. The OECD assessment also points out that, to promote long-term economic growth, Latvia should continue to shift the tax burden from labor to other (consumption and capital) taxes, while increasing the progressivity of the personal income tax.