The net wage in recent years

MONETARY POLICY REPORT | WINTER 2025 (appendix 2)
(authors: Barbara Livorová, Adam Ruschka)

Labour income strongly affects households’ purchasing power and serves as an indicator of the strength of demand-pull inflationary pressures. It is normally captured using the average gross monthly wage. However, this may not be a sufficient measure from the longer historical perspective. If the previous period saw legislative changes that subsequently affected total labour taxation (personal income tax and health and social insurance) and thus also net income, the gross wage may not faithfully capture the purchasing power of households. Moreover, households’ real purchasing power is affected by the change in the price level over time (inflation) in addition to net nominal income. This appendix therefore summarises the relevant legislative changes and their effects on the nominal and real net wage.^[1]

A whole range of discretionary fiscal measures have affected nominal net wage growth since 2008. Table 1 provides an overview of tax and non-tax changes.

Table 1 – Overview of fiscal measures affecting the net wage and the changes made to them in 2008–2025

In 2008, the multiple income tax bands were replaced by a flat tax rate. The basic rate of personal income tax remained unchanged over the entire period (at 15%). However, a “solidarity tax” (a surtax) was introduced in 2013. This involved an additional tax rate applied to high-income individuals: persons with an annual income of more than 48 times the average monthly wage were taxed an extra 7% on their income above this threshold. This portion of their income was therefore subject to an overall tax rate of 22%. In 2021, the solidarity tax was abolished and replaced with a progressive tax schedule, with income of less than 48 times the average monthly wage taxed at 15% and income above this threshold at 23%. This raised the (marginal) rate on high incomes by 1 pp. The definition of high-income individuals was itself tightened in 2024, as the threshold for higher taxation was reduced to annual income of 36 times the average monthly wage^[2] (converted to monthly income, the threshold was lowered from four times to three times the average monthly wage). The net wage of high-income individuals traditionally reflects the ceiling set for the payment of social insurance (the maximum assessment base). No social insurance is paid on income above this ceiling, or rather on the accumulated amount of such income in the given year. High-income individuals therefore have a lower effective social insurance rate. The most recent measure is the introduction in 2025 of a deduction from the employee assessment base (6.5% a month) for social security contributions for working pensioners (employees who have reached retirement age, are drawing a retirement pension and are entitled under the law to a full old-age pension).

The personal income tax calculation base was increased in 2008 by the introduction of the super-gross wage, i.e. the employee’s gross wage plus the health and social security contributions that the employer pays per employee per month. This measure was abolished in 2021, resulting in an increase in the net wage due to a reduced tax calculation base (the effective tax rate fell de facto by about 5 pp). With the exception of 2011, the tax deduction per taxpayer has also been increasing steadily. In 2024, sickness insurance contributions paid by employees were reintroduced as well (at 0.6% of the gross wage). This was reflected in an increase in the total social insurance rate. The rate for health insurance contributions paid by employees has been unchanged since 2008.

Chart 1 shows how these legislative changes have been reflected in the difference in levels and year-on-year growth of the average net and gross wage. It is clear from the aggregated average wage values that the most significant change in the last 15 years or more was the change in the personal income tax assessment base from the super-gross to the gross wage. The reduction of the assessment base caused a sizeable drop in taxes paid, leading to distinctly faster growth in households’ net income. Year-on-year median wage growth (see Chart 2) more visibly reflects other changes that affected the net wage. These included in particular a reduction of the rate for social insurance contributions paid by employees, which significantly increased net wage growth in 2009. The increase in this rate in 2024 had a large effect in the opposite direction. A difference in the growth rates is also visible in 2011, caused by the change in the deduction of personal income tax per taxpayer. However, the abolition of the super-gross wage as the tax base remains the biggest milestone. It contributed to double-digit year-on-year growth in the net wages of median-income households.

Charts 1 and 2 – Comparison of net and gross wage growth
y-o-y growth in %

However, the purchasing power of households is determined by the price level as well as income. Charts 3 and 4 therefore show the evolution of the real wage, i.e. the figures adjusted for the change in the consumer price index (CPI). Inflation has the same effect on the net wage and the gross wage. In the case of the real net wage, however, the loss of purchasing power caused by high inflation was partially offset by a reduction in taxes paid to the government due to the legislative changes described above (in particular, the reduction of the personal income tax assessment base in 2021). The decline in the real net (average and median) wage in 2021 and 2022 was thus not as large as that in the real gross wage. According to the forecast contained in the Winter 2025 MPR, the real gross wage will not return to its pre-pandemic 2019 level until 2026, while the real net wage has already reached its 2019 level. While the gross real wage in 2024 Q3 was 4.4% lower on average (and 2.4% lower in median terms) than in 2019, the net real wage was already 0.6% higher on average and even 2.5% higher in median terms.

Charts 3 and 4 – Average and median real wage compared to 2019
monthly real wage in CZK adjusted for CPI; CPI: 2019 = 100

This simplified computation thus indicates that the labour income of Czech employees has a similar purchasing power on average as it did before the substantial shocks of recent years. It offers new insights into the real income situation of Czech households. First, more than half of them now have greater real purchasing power than they did in 2019, which simultaneously helps to explain the still elevated saving rate. So, thanks to a combination of subdued consumption and solid net income, households naturally saved more. Second, the evolution of net income is an important piece of information for monetary policy. Policymakers should cautiously monitor the potential inflationary pressures arising from households’ rapidly recovering consumption. The growth in net income gives this consumption somewhere to stem from.

^[1] This calculation serves to illustrate the paths of the gross and net wage, which differed in the past due to changes in the taxation of personal income. It is not an exact calculation of the evolution of the net wage for the average taxpayer, because the net wage can differ even for taxpayers that have the same gross wage due to tax deductions applied by these taxpayers (such as the child deduction).

^[2] The average monthly wage is set by government regulation. For 2024, it was set at CZK 43,967. The threshold for the higher tax rate was therefore CZK 1,582,812 of gross income, which equates to CZK 131,901 a month.