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The invisible tax increase: How frozen brackets drive Poland’s budget

Freezing tax thresholds is a mechanism that works quietly but effectively. It allows the state to boost budget revenues without raising tax rates and without headline-grabbing political decisions. For taxpayers, however, it means something quite different. If nothing changes, as early as 2030 a person earning the average wage could be paying a 32% tax rate on every additional PLN of income. Yet there are also relative winners in this process.

Marek Skawiński
11.01.2026, 20:59
Polish tax returns on the background of Polish money
As nominal incomes – mainly wages as well as pensions and disability benefits – rise, the system’s built-in nominal rigidities push up effective taxation. Photo shows Polish tax returns on the background of Polish money - Złoty. Photo: Getty Images

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2022-2024 ...

Tax due under the progressive tax scale rose by almost 75% in just two years (between 2022 and 2024). Over the same period, the total amount of tax paid by taxpayers using the flat tax (PIT-36L) and the lump-sum tax on registered revenues (PIT-28) increased by only 15%.

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This reflects a number of factors, above all the freezing of key parameters of the progressive tax scale: the tax-free allowance (PLN 30,000; about EUR 7,000), the second tax threshold (PLN 120,000; about EUR 28,000), and the income cap for the “youth” tax relief (around PLN 85,000; about EUR 20,000).

As nominal incomes – mainly wages as well as pensions and disability benefits – rise, the system’s built-in nominal rigidities push up effective taxation. Recently, the Ministry of Finance reported that nearly 2 million taxpayers found themselves in the second tax bracket in 2024.

More than 1% of GDP in additional revenue

Freezing tax thresholds is the single most important revenue-side measure of the current government. The policy was maintained in the past year and will remain in force in 2026. According to the Ministry of Finance, the freeze generated revenues equivalent to 0.44% of GDP in 2024 (around PLN 16 billion, or about EUR 3.7 billion) and 0.32% of GDP in 2025 (around PLN 12.5 billion, or about EUR 2.9 billion). Ministry experts estimate that in 2026 it will deliver a further PLN 14 billion in additional receipts (around EUR 3.3 billion), equivalent to 0.28% of GDP

In total, between 2024 and 2026, additional revenues for the public finance sector from this measure are expected to reach around PLN 42.5 billion (about EUR 9.8 billion), or more than 1% of GDP.

8% of GDP in deficit?

This process has two key dimensions. The first is purely fiscal. Simply put: without the freezing of tax thresholds since 2022, the projected public finance deficit in 2025 would not be 6.9% of GDP but closer to 8% of GDP.

When the government avoids bolder reforms to stabilize public finances, it relies on the simplest and least controversial solutions. The hidden tax increase resulting from frozen thresholds is one of them. The government does not have to announce a tax hike -inaction is, after all, the default option in the tax system. Crucially, the changes included in the 2026 budget law (including a higher corporate income tax for banks and increased excise duties on alcohol) are expected to generate lower revenues for central and local government institutions than the freezing of tax thresholds.

Freezing as a fiscal safety valve

On the other hand, freezing the parameters of the tax scale can be seen as a safety valve for the state’s fiscal position. In a political deadlock – between a government reluctant to impose socially costly tax hikes and the possibility of presidential vetoes (as with the proposed increase in alcohol excise, supported by most economists) – freezing thresholds remains one of the few available options.

Automatic indexation of tax thresholds, practiced in roughly half of OECD countries, is fairer from the perspective of individual taxpayers, but it could carry the risk of destabilizing public finances

But some lose more than others

Seeing the freezing of tax thresholds as a last-resort measure to protect the state’s fiscal health does not mean it has no redistributive effects. These effects are real and pronounced.

Taxpayers are affected differently depending on their form of PIT taxation. By definition, freezing thresholds means that the effective PIT rate rises for those on the progressive scale as their income increases – once it exceeds the tax-free allowance of PLN 30,000 (about EUR 7,000).

For flat-tax and lump-sum taxpayers, the effective rate – simplifying somewhat – remains relatively constant, due to the absence of a tax-free allowance and a second threshold. This has resulted in a much slower growth of total tax owed – 15.5% - compared with 74.2% on the progressive scale over the same period. Aggregating both forms accounts for taxpayers moving between the different filing systems.

... and 2024-2026

Full data for 2025 and 2026 will only be available in December 2026 and 2027, respectively. To illustrate, however, that the disparity persists, forecasts from the 2026 budget law (on a cash basis) have been used. According to these projections, between 2024 and 2026 revenues from the progressive tax scale will rise by 35.5%, while the combined increase in revenues from the flat tax and lump-sum regime will be just 15.5%

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The greater disparity in 2022–2024 was partly the result of macroeconomic factors. Wages, as well as pensions and disability benefits, lagged behind earlier years’ growth in corporate profits, resulting in high nominal income growth and, consequently, substantial revenues from frozen tax thresholds.

Currently, this growth is slowing, but a larger number of taxpayers have moved further to the right along the income distribution, crossing or approaching higher tax brackets. As a result, despite the slowdown in wage growth, the fiscal effect of freezing thresholds remains significant.

Explainer

A quick look at Polish PIT options

Poland uses a two-tier progressive tax system:

First threshold (up to 120,000 PLN annual income):

  • 12% tax rate
  • Minus tax-free amount: 30,000 PLN annually

Second threshold (above 120,000 PLN annual income):

  • 32% tax rate on income above 120,000 PLN (the 12% still applies to the first 120,000 PLN).

Several alternatives to standard PIT for entrepreneurs and certain situations:

1. Lump-sum tax:

  • For self-employed/sole proprietors
    • Fixed percentage of revenue (not profit) based on business type, e.g. 17% for most professional services (IT, consulting, etc.)
  • No deduction of costs - you pay tax on gross revenue

2. Linear flat tax rate - 19%:

  • Flat 19% rate on all income regardless of amount
  • No tax-free amount
  • Can deduct business costs
  • Used by higher earners to avoid 32% rate

Summary

Freezing the parameters of the tax scale can today be seen as the “only realistic method” of significantly raising taxes in Poland. However, it carries serious redistributive consequences. Around 62% of income taxed under the scale comes from employment contracts, and about 27% from pensions and disability benefits. These sources of income are now relatively more heavily taxed than in 2022, especially compared with income from non-agricultural business activity, which is mostly taxed under the flat rate or lump-sum regimes.

The tax burden rises most sharply for those whose entire additional income each year falls into a higher tax bracket – i.e. earners of roughly more than PLN 11,900 (EUR 2,820) gross before any pay increases.

By 2026, earning around 127% of the average wage will be enough to enter the second tax bracket. By 2030, without systemic changes, a single person earning the average wage will face a marginal tax rate of 32% on their last złoty earned.

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Key Takeaways

  1. Redistributive effects. Freezing the parameters also has clear redistributive consequences: it causes some taxpayers to contribute more to public finances than before. Tax due under the progressive scale rose by almost 75% in just two years (2022–2024). Over the same period, total tax paid by taxpayers under the flat tax and lump-sum regimes increased by only 15%. The tax burden rises most sharply for those whose entire additional income each year falls into a higher bracket – earnings above roughly PLN 11,900 (EUR 2,820) gross before pay increases. By 2030, without systemic changes, a single person earning the average wage will face a marginal tax rate of 32% on the last złoty earned.
  2. Freezing tax scale parameters – the tax-free allowance (PLN 30,000; about EUR 7,000), the second tax threshold (PLN 120,000; about EUR 28,000), and the income cap for the “youth” relief (around PLN 85,000; about EUR 20,000) – means that as nominal incomes rise, mainly wages as well as pensions and disability benefits, effective taxation increases.
  3. Fiscal impact and safety valve function. Between 2024 and 2026, the additional revenues for the public finance sector resulting from frozen tax parameters are expected to reach around PLN 42.5 billion (about EUR 9.8 billion), or more than 1% of GDP. This is the most significant revenue-side measure of the current government. It can also be seen as a safety valve for the state’s fiscal position. In a political deadlock – between a government reluctant to impose socially costly tax hikes and potential presidential vetoes (as with the planned alcohol excise increase, supported by most economists) – freezing thresholds remains one of the few available options.