Calculating Salary with Pension Contributions: A Guide

04/04/2024

Accumulating pension scheme contributions involves monthly calculations based on gross income. Moving forward, income tax will be computed from the remaining amount after deducting the pension contribution. Gross income for an employee encompasses the total of accrued salary, fringe benefits (e.g., bonuses), and non-monetary benefits (e.g., insurance).

Pension contributions are determined by the following criteria:

If the employee's annual salary is below 24,000 GEL, the breakdown is as follows: the employee contributes 2%, the employer contributes 2%, and the state contributes 2%.
For an employee earning less than 60,000 GEL annually, the contributions are split as follows: the employee contributes 2%, the employer contributes 2%, and the state contributes 1%. For instance, if the salary is 30,000 GEL annually, the state contributes 2% of 24,000 and 1% of 6,000 (30,000 - 24,000).
If the employee's annual salary exceeds 60,000 GEL, the breakdown is as follows: the employee contributes 2%, the employer contributes 2%, and the state does not contribute. For example, if the salary is 70,000 GEL annually, the state contributes 2% of 24,000, 1% of 36,000 (60,000 - 24,000), and nothing further for the remaining 10,000 (70,000 - 60,000).

Let’s break down the calculation for the amount payable to the employee in different situations:

Example #1:

Let’s consider Helen. Helen’s monthly salary, including bonuses, amounts to 800 GEL. Additionally, if performance targets are met, she receives a bonus of 100 GEL, inclusive of income tax.

According to the given scenario, Helen’s total income is 900 GEL (800 + 100). Therefore, we use this total to calculate the pension contribution. Let’s determine Helen’s pension contribution:

900 * 0.02 = 18 GEL

Helen’s pension contribution amounts to 18 GEL, which is paid by both the employer and the state.

Income tax is computed based on the remaining amount after pension contributions. Consequently, Helen will receive 80% of the remainder:

(900 – 18) * 0.8 = 705.6 GEL

Example #2:

Let’s analyze the calculation for the amount payable to the employee in the case of Zura:

Zura’s monthly salary, including bonuses, amounts to 800 GEL. Additionally, upon fulfilling the plan, he receives a bonus of 100 GEL, inclusive of income tax. Furthermore, he has an insurance package costing 100 GEL, which, inclusive of income tax, totals 125 GEL.

According to the provided information, Zura’s total income is 1025 GEL (800 + 100 + 125). Therefore, we use this total to calculate the pension contribution. Let’s determine Zura’s pension contribution:

1025 * 0.02 = 20.5 GEL

Zura’s pension contribution amounts to 20.5 GEL, which is paid by both the employer and the state.

It’s important to note that prior to the pension reform, Zura did not have to contribute anything for the insurance. However, under the new reform, he is required to pay 2% of this benefit from his salary. Consequently, Zura’s salary will decrease more than Helen’s in the previous example. Before the reform, they received the same amount.

Example #3:

We anticipate that the scenario outlined in the second example will be rare, and more commonly, employers will cover both 2% of non-cash benefits.

Let’s consider Anna. Anna and Zura have identical salaries and benefits; however, Anna’s employer covers both 2% of the insurance package.

In other words, Anna’s contribution will only be 2% of 900 GEL (18 GEL), while the employer, in addition to this 18 GEL, will also cover part of the insurance package contribution.

Thus, before the reform, the employer spent 125 GEL on the insurance package, which constituted 100%. Now, the employer will incur higher costs, and the same 125 GEL will represent 96%, as they also cover the employee’s contribution:

Let’s calculate the proportion:

125 – 96%

X – 100%

X = 125 * 100 / 96 ≈ 130

If the employer previously paid 125 GEL for Anna’s insurance, they will now need to pay approximately 130 GEL.

Example #4:

In the previous example, we considered the scenario where Helen only paid her 2%. However, there could be a situation where the employer, to avoid increasing costs, reduces the employee’s contractual salary.

Let’s consider Tako. Tako’s monthly salary, including bonuses, amounts to 800 GEL. Upon executing the plan, he receives a bonus of 100 GEL, bringing his total salary, like Elena’s, to 900 GEL. The employer aims to maintain Tako’s salary at 900 GEL even after the reform. Therefore, if Tako’s 900 GEL represented 100% of his salary before, it should now represent 102%. Let’s calculate this proportion:

900 – 102%

X – 100%

X = 900 * 100 / 102 ≈ 882

In Tako’s new contract, it will state that the salary charged to him is 882 GEL. Consequently, the employer will spend exactly the same amount of money on Tako as before the reform.

Example #5:

In some cases, the employer may wish to maintain the same amount deducted from the employee as before the reform, without reducing it. This would require an increase in the employee’s accrued salary.

Let’s consider Temo. His current salary is 900 GEL, which means he used to receive 720 GEL before the introduction of the pension scheme. The employer aims for Temo to receive 720 GEL again.

If Temo’s salary was 900 GEL representing 100% before the reform, his salary should now be increased so that the same 900 GEL represents 98%.

Let’s calculate the proportion:

900 – 98%

X – 100%

X = 900 * 100 / 98 ≈ 918

Therefore, Temo’s new contract specifies that his accrued salary is 918 GEL.

How to calculate the gross salary from the net salary and vice versa

To calculate the gross salary using the net salary, the following formula should be used:

X / 0.8 / 0.98 = Y

X = Net Salary

Y = Gross Salary

And if, on the contrary, we want to calculate the net salary using the gross salary, we will use the following formula:

X = Y * 0.8 * 0.98

X = Net Salary

Y = Gross Salary

Income Benefits

For employees exempt from income tax, they are still required to make pension contributions. For instance:

Let’s consider Katie, who has an accrued salary of 1000 GEL. Although her salary of 6000 GEL earned during the calendar year is exempt from taxation, she is still obligated to make pension contributions. In essence, before the reform, Katie would receive 1000 GEL in January, but now she will receive 980 GEL. Subsequently, 980 GEL will be deducted from her limit, i.e., 6000 GEL, every month.

Finally, it’s important to reiterate that the pension reform took effect in January. This implies that, as per the new regulation, only the wages earned within the current year will be accounted for. For instance, if an employee receives their December salary in January, only income tax will be deducted from the January salary, not the pension contribution. Similarly, if they receive their January salary in February, the initial contribution will commence in February. Pension contributions will be deducted from each payday based on the salary paid to your employees.