How to Apply the Substitute Tax on Wage Increases & Productivity Bonuses in Italy (2026), Step-by-step Employer Payroll Procedure

Italy’s 2026 Budget Law (Legge n. 199/2025, published in the Gazzetta Ufficiale on 30 December 2025) introduced three temporary substitute tax measures that directly affect how employers process payroll: a 5% flat tax on contractual wage increases arising from collective bargaining renewals, a 15% flat tax on specified night-shift, holiday and turn allowances, and a reduced 1% rate on productivity bonuses up to €5,000. Understanding how to apply the substitute tax on wage increases in Italy (2026) is now an immediate compliance obligation for every private-sector employer running payroll this year. This guide walks CFOs, payroll managers and in-house counsel through the full procedure, from identifying qualifying payments to year-end reconciliation, with worked numerical examples, required-document checklists and key deadlines.

Overview of the Process and Who It Applies To

The substitute tax 2026 Italy framework replaces ordinary IRPEF on three categories of employment income. Instead of taxing these items at the employee’s marginal rate (which can reach 43%), the employer withholds a flat-rate substitute tax at source, remits it via the Modello F24, and reports it in the annual Certificazione Unica (CU). The three regimes, all applicable to amounts paid between 1 January 2026 and 31 December 2026, are:

• 5% substitute tax on contractual wage increases. Applies to pay rises deriving from national collective bargaining agreement (CCNL) renewals signed during the 2024–2026 cycle, as provided by Legge n. 199/2025.
• 15% substitute tax on night, holiday and shift-turn allowances. Applies to qualifying allowances up to an annual cap of €1,500 per employee, subject to an employee income ceiling defined in the statute.
• 1% substitute tax on productivity bonuses. A reduced rate (down from the previous 5%) on performance-related bonuses and profit-sharing schemes up to €5,000 per year, linked to second-level bargaining agreements deposited with the Ministry of Labour.

Employer obligations under these regimes are threefold: calculate the correct taxable base, withhold the substitute tax at each payroll run, and remit the amounts to the Agenzia delle Entrate using the designated F24 codici tributo. The measures are temporary, legislated for 2026 only (with the productivity bonus regime extending into 2027), and participation is automatic unless the employee files a written renunciation requesting ordinary IRPEF treatment.

The scope is limited to private-sector employers. Public-administration employers are excluded, as are employers applying the Regime Forfettario. Employees must meet specific income thresholds (detailed below) to qualify.

Eligibility and Prerequisites for the Substitute Tax 2026 Italy

Before running payroll with the substitute tax, the employer must confirm that both the entity and each employee meet the statutory prerequisites. Applying the wrong rate, or applying a substitute tax to an ineligible worker, creates an IRPEF shortfall that the employer must rectify with interest and potential penalties.

Income Thresholds and Caps

Each of the three substitute tax regimes carries its own income ceiling and annual cap, as set out in Legge n. 199/2025:

• 5% on contractual wage increases. Available to employees whose total gross employment income in the prior tax year (2025) did not exceed the threshold established by the statute. The taxable base is the amount of the CCNL pay increase itself, not the employee’s total salary.
• 15% on night/holiday/shift allowances. The annual cap on qualifying allowances is €1,500 per employee. The employee’s prior-year gross income must fall within the statutory ceiling. Amounts exceeding the €1,500 cap revert to ordinary IRPEF.
• 1% on productivity bonuses. The bonus amount eligible for the reduced rate is capped at €5,000 per calendar year. The employee’s prior-year gross income must not exceed €80,000. The bonus must be linked to a second-level collective or company agreement deposited with the Ministry of Labour and must be tied to measurable productivity, profitability, quality or efficiency targets.

Multi-employer situations require care: where an employee has worked for more than one employer during the reference year, the payroll manager must aggregate gross income from all sources. Employees can provide a self-declaration or the payroll team can rely on the prior-year CU data.

Interactions with Other Regimes

Certain substitute tax exemptions and exclusions apply. Workers benefiting from the lavoratori impatriati regime (special tax relief for returning or newly resident workers) may face interaction issues, the substitute tax applies in lieu of IRPEF on the qualifying component, but the impatriate relief also modifies the IRPEF base. Early indications suggest employers should treat the two as mutually exclusive on the same income component, applying whichever is more favourable and documenting the choice. Employees under the Regime Forfettario (flat-tax self-employment regime) are not eligible because they are not employment-income earners. Researchers and academics under the special regime should be assessed individually against the statute’s scope.

How to Apply the Substitute Tax on Wage Increases in Italy (2026), Step-by-Step Procedure

The following procedure applies to each payroll cycle in which qualifying payments are made. The table below summarises the six steps, responsible parties and typical durations, followed by detailed guidance for each step.

Step 1, Identify Qualifying Payments in the Payroll Run

Begin each payroll cycle by mapping CCNL clauses to payroll line items. The 5% substitute tax applies only to the portion of the salary increase attributable to a qualifying CCNL renewal (signed 2024–2026). This means the payroll team must isolate the contractual increment from any ad hoc discretionary raise, seniority step or superminimo adjustment. Absorbable superminimi that are formally reduced by the same amount as the CCNL increase do not generate a net qualifying payment, only the net uplift counts.

For the 15% regime, identify night-shift premiums (maggiorazione notturna), holiday-work premiums and shift-turn allowances (indennità di turno) that are explicitly listed as qualifying items under the statute and confirmed in Agenzia delle Entrate Circolare n. 3/E of 24 June 2026.

For the 1% productivity bonus regime, verify that the bonus is governed by a deposited second-level agreement and tied to documented, measurable targets (output per unit, revenue growth, quality metrics, etc.).

Step 2, Verify Employee Eligibility and Income Caps

For each employee receiving a qualifying payment, confirm prior-year gross employment income against the relevant statutory threshold. Use the employee’s 2025 CU or an internal annualisation of gross pay. Where the employee joined mid-year or had multiple employers, request a self-declaration of total 2025 employment income or obtain the prior-year CU from the previous employer.

For the productivity bonus tax 2026 regime, the €80,000 income ceiling is assessed against the employee’s total gross employment income in 2025. Keep documentation of the income check for each employee, this is a core audit-defence item.

Step 3, Calculate the Taxable Base and Apply the Substitute Rate

Once qualifying payments and eligibility are confirmed, calculate the substitute tax. Below are two worked examples.

Example A, Contractual wage increase (5% substitute tax):

• Employee receives a monthly CCNL renewal increase of €150 gross, effective January 2026.
• Substitute tax: €150 × 5% = €7.50 withheld.
• Net increase to employee: €150 − €7.50 = €142.50 (before social security contributions, which are calculated on the gross amount separately).
• Compared with ordinary IRPEF at a marginal rate of 35%, the employee would have paid €52.50, the substitute tax saves the employee €45.00 per month.

Example B, Productivity bonus (1% substitute tax):

• Employee earns a one-off annual productivity bonus of €4,000, paid in June 2026. Prior-year gross income: €55,000 (below €80,000 threshold).
• Substitute tax: €4,000 × 1% = €40.00 withheld.
• Net bonus to employee: €4,000 − €40.00 = €3,960.00 (before INPS contributions, if applicable).
• INPS contribution treatment: consult INPS Circular CA2026_0059, which details whether the bonus amount is subject to reduced social contributions or full contributory obligations alongside the substitute tax.

Payroll journal entry (Example A, monthly):

• Debit: Salary expense, CCNL increase: €150.00
• Credit: Substitute tax payable (liability account): €7.50
• Credit: Net pay to employee: €142.50

Step 4, Withhold the Substitute Tax and Configure Payroll Software

The substitute tax must be withheld in the same payroll period in which the qualifying payment is made. Configure the payroll system to create a separate withholding line for each substitute tax regime (5%, 15%, 1%). This line must appear distinctly on the payslip and in internal reporting, because it feeds directly into the CU and the F24 remittance.

Most payroll software vendors have released configuration updates for the 2026 substitute tax codes. Confirm with your vendor that the new withholding codes are active and correctly mapped to the F24 codici tributo published by the Agenzia delle Entrate. Failure to segregate the substitute tax from ordinary IRPEF in the ledger will create reconciliation problems at year-end.

Step 5, Allocate F24 Codici Tributo and Remit Payment

The Agenzia delle Entrate has instituted specific codici tributo for each substitute tax regime. These codes are entered in the “Erario” section of the Modello F24. When completing the F24:

1. Select the correct codice tributo for the regime (5% contractual increases, 15% allowances, or 1% productivity bonus), verify the exact codes on the Agenzia delle Entrate codici tributo search page.
2. Enter the reference period (month/year of the payroll in which the withholding occurred).
3. Submit the F24 electronically via Entratel or Fisconline (or through a delegated intermediary such as a commercialista or payroll service provider).

Payroll withholding Italy 2026 follows standard monthly remittance timing: amounts withheld in month N are generally due by the 16th of month N+1. Quarterly remittance may be available for smaller employers, confirm eligibility with your intermediary.

Step 6, Report in Year-End CU and Reconcile

At year-end, the employer must include all substitute tax withholdings in the Certificazione Unica (CU), using the dedicated fields for substitute taxes. The CU must report the gross qualifying amount, the substitute tax rate applied, and the amount withheld, separately for each regime. This data also flows into the employer’s annual Modello 770 return.

Conduct an internal payroll compliance checklist reconciliation: cross-reference the sum of monthly substitute tax withholdings against the total F24 payments made during the year. Any discrepancy must be investigated and corrected before CU filing. Retain all supporting documentation for a minimum of five years (or longer under your internal record-retention policy).

Required Documents and Information

Employers must assemble and retain the following documents to support substitute tax application and to defend their position in the event of a tax audit. This payroll compliance checklist should be maintained for each payroll cycle and updated at year-end.

Timeline and Key Deadlines for Payroll Withholding Italy 2026

Employers must synchronise their payroll calendar with the reporting deadlines below. Missing a remittance window triggers interest charges and potential penalties under ordinary tax-collection rules.

Employers who began paying qualifying increases in January 2026 but had not yet configured payroll systems for the substitute tax should conduct a retrospective reconciliation as soon as possible, adjusting withheld amounts and filing corrective F24 payments to avoid accumulating interest.

Costs, Fees and Tax Considerations

The table below summarises the direct tax costs associated with each substitute tax regime, along with the practical administrative costs employers should budget for.

Social security contributions (INPS): The substitute tax replaces IRPEF, it does not replace INPS contributions. Qualifying payments generally remain subject to ordinary social security contributions unless a specific contribution relief applies (as may be the case for certain productivity bonuses under existing INPS incentive schemes). Employers should consult INPS Circular CA2026_0059 and any subsequent messages to confirm the contributory treatment applicable to each payment category.

What Changes in 2026, The Substitute Tax Landscape

The 2026 regime represents a significant expansion and modification of prior Italian substitute tax rules. Key changes introduced by Legge n. 199/2025 and clarified by Agenzia delle Entrate Circolare n. 3/E of 24 June 2026 include:

• New 5% regime for contractual wage increases. This is an entirely new measure for 2026, applying specifically to pay rises from CCNL renewals during the 2024–2026 bargaining cycle. No comparable regime existed in prior years.
• New 15% regime for shift/night/holiday allowances. Also a 2026 introduction, with a defined annual cap (€1,500) and income eligibility ceiling.
• Productivity bonus rate reduced from 5% to 1%. The substitute tax on performance bonuses already existed, but the rate has been cut sharply from 5% to 1% for 2026 (and 2027), while the €5,000 annual cap on eligible bonus amounts and the €80,000 income ceiling are maintained.
• New F24 codici tributo. The Agenzia delle Entrate has published dedicated payment codes for each regime, employers must use these new codes rather than pre-existing productivity bonus codes.
• Clarificatory circulars. Circolare n. 3/E of 24 June 2026 provides interpretive guidance on the scope of qualifying payments, multi-employer situations, and the interaction between the substitute tax exemptions and other relief regimes. Employers should treat this circular as the operative administrative reference for payroll implementation.

Industry observers expect further INPS clarifications in the second half of 2026 regarding contribution treatment, particularly where the 1% productivity bonus regime overlaps with existing contribution-relief schemes for performance pay.

Common Pitfalls and How to Avoid Them

• Misidentifying qualifying payments. Not every pay increase qualifies for the 5% rate. Ad hoc raises, seniority increments and discretionary bonuses are excluded. Review the specific CCNL renewal text and map each payroll element. If in doubt, request a formal opinion from tax counsel before applying the substitute rate.
• Applying the wrong rate. Confusing the 5% (contractual increases), 15% (allowances) and 1% (productivity bonuses) regimes leads to under- or over-withholding. Maintain separate payroll codes for each regime from the outset.
• Failing to check income thresholds. Applying the substitute tax to an employee who exceeds the prior-year income ceiling is an error the employer must correct, potentially triggering interest. Automate threshold checks in the payroll system using prior-year CU data.
• Using incorrect F24 codici tributo. Remitting with the wrong code delays the payment’s allocation by the Agenzia and may trigger a mismatch notice. Verify codes against the Agenzia delle Entrate’s official codici tributo database before the first remittance.
• Not obtaining or retaining employee renunciations. If an employee prefers ordinary IRPEF treatment, the employer must hold a signed written renunciation. Absence of this document in an audit creates liability risk.
• Neglecting year-end reconciliation. Discrepancies between monthly F24 payments and the annual CU/770 filings will trigger automated notices from the Agenzia. Build a reconciliation step into the payroll calendar 2–4 weeks after the December payroll run.

Sources

1. Gazzetta Ufficiale, Legge n. 199/2025 (Legge di Bilancio 2026)
2. Ministero dell’Economia e delle Finanze, Documentazione e prassi interpretativa
3. Agenzia delle Entrate, Official site (circulars and operational guidance)
4. Agenzia delle Entrate, Codici tributo search
5. INPS, Circular CA2026_0059
6. OECD, Taxing Wages 2026: Italy country note
7. Senato della Repubblica, Legislative Dossier (commi text and explanatory notes)