Italy’s 2026 Productivity Bonuses: 1% Tax, Eligibility and Benefits for Employers

The new tax regime: 1% substitute tax

Article 1(9) of Law No. 199 of 30 December 2025 provides a 1% substitute tax for qualifying productivity bonuses and eligible employee profit-sharing payments made in 2026 and 2027, up to a combined annual amount of €5,000.

In 2025 the preferential rate was 5%, with an ordinary annual ceiling of €3,000. The new rate replaces personal income tax and regional and municipal surtaxes on qualifying amounts, unless an employee expressly opts out in writing. It does not replace social security contributions.

Who can benefit? The €80,000 threshold

The scheme is available to private-sector employees, including those on fixed-term and permanent contracts, whose employment income in the preceding year did not exceed €80,000. For bonuses paid in 2026, the relevant income is earned in 2025, including income from other employers.

Where the paying employer lacks complete information on the employee’s prior-year income, an appropriate written declaration is required. The income threshold is only one element of eligibility: the bonus itself must also satisfy the statutory requirements.

Not all bonuses qualify

Qualifying bonuses must be variable and linked to measurable and verifiable improvements in productivity, profitability, quality, efficiency or innovation, assessed over an appropriate period under the applicable collective agreement.

Possible indicators include increased output per working hour, reduced waste, shorter service times, better profitability or documented improvements in service quality. The criteria must be objective and agreed before performance is measured.

A discretionary gratuity or guaranteed payment does not become eligible simply because it is called a “productivity bonus” on a payslip.

Collective agreements and electronic filing

The bonus must be paid under an eligible company-level or territorial collective agreement concluded by the appropriate bargaining parties. Smaller businesses can assess whether an existing territorial agreement is suitable, rather than automatically negotiating a new company agreement.

The agreement should set out the indicators, reference period, eligibility and calculation rules. It must be filed electronically with the Ministry of Labour within 30 days of signing, together with the prescribed compliance information. The filing requirements are material to tax eligibility.

Illustration: the tax effect on a €2,000 bonus

Consider the same €2,000 taxable base, after any employee social security contributions. If, without the incentive, that amount would fall entirely within the 33% marginal personal income tax bracket applicable from 2026 to income between €28,000 and €50,000, the simplified comparison is as follows.

The illustrative income tax difference is €640: €660 under the assumed ordinary rate versus €20 at the 1% substitute rate. This is not a complete payroll simulation and excludes local taxes, credits, other income-based effects and individual circumstances.

The employer’s tax and contribution costs are different

The 1% income tax benefits the employee. Monetary bonuses generally remain subject to ordinary social security contributions; employers therefore need to distinguish employee net pay, the gross bonus and the full payroll cost.

A separate contribution incentive can apply when the strict conditions for equal employee participation in work organisation are satisfied. On a qualifying bonus portion of up to €800, the employer’s IVS pension contribution rate may be reduced by twenty percentage points and employee contributions excluded for that portion, with corresponding pension effects. This relief does not automatically follow from the 1% tax regime.

Cash bonuses or employee welfare?

Where the relevant agreement provides the option, employees may convert qualifying monetary bonuses into welfare benefits or contributions within the statutory framework. Some benefits may be excluded from taxable employment income, subject to conditions and limits.

Potential options include education and family services, supplementary healthcare, pension contributions and other permitted benefits. Tax exemptions are not universal and must be reviewed for each type of benefit.

Businesses should compare cash bonuses, welfare conversion and social security effects rather than assuming the same outcome for every employee.

Employer checklist

A robust incentive plan starts with verifiable operational goals, not with the tax calculation. Performance metrics should be set before the assessment period.

• Identify measurable improvements in productivity, profitability, quality, efficiency or innovation.
• Define a suitable performance period and objective criteria in advance.
• Check the company or territorial collective agreement and authorised bargaining parties.
• File the agreement electronically with the required declaration.
• Verify employees’ 2025 income for bonuses paid in 2026.
• Model income tax, social security contributions and employer costs.
• Retain the agreement, calculations and evidence supporting achieved results.

A practical approach for businesses

The 1% substitute tax makes qualifying productivity bonuses particularly attractive in 2026 and 2027, but the value depends on the reward scheme and compliance with the legal requirements. Limited liability companies and cooperatives should start by identifying performance indicators they can genuinely measure.

FC Consulting & Management assists businesses and cooperatives with payroll cost analysis, employment taxation and the evaluation of performance-pay and welfare arrangements.