A new tax regulation set to take effect on January 1 will significantly change the way wages are taxed in Azerbaijan’s private sector, introducing a progressive income tax system for the first time in recent years.
Under the new rules, employees working under labor contracts will pay income tax at 3% in 2026, 5% in 2027, and 7% starting in 2028. The tax will apply to monthly salaries of up to 2,500 manats, directly deducted from workers’ pay rather than covered by employers.
Lower Take-Home Pay for Employees
Economist Rashad Gasimov explained that even small tax rates will reduce real incomes for thousands of workers:
“For a salary of 600 manats, the employee will lose about 18 manats per month in 2026, 30 manats in 2027, and 42 manats from 2028 onward. This will lead to a decrease in disposable income,” he said.
The reform marks a major shift in Azerbaijan’s post-2019 wage taxation model, where many private-sector workers were exempted from income tax as part of economic stimulus measures.
Employers Encouraged to Compensate the Difference
Member of Parliament and economist Vugar Bayramov, who serves on the Parliamentary Committee on Economic Policy, Industry, and Entrepreneurship, said the new rules will not affect those working under service or civil contracts.
He suggested that private companies could offset the additional tax burden by modestly raising wages:
“If an employee earns 1,000 manats, the employer could raise the salary enough to cover the extra 30 manats in taxes. This way, the worker’s net pay remains unchanged compared to 2025,” Bayramov noted.
Breakdown of a Typical Paycheck
For a 1,000-manat salary, the deductions would include:
30 manats in income tax,
86 manats to the State Social Protection Fund,
5 manats for unemployment insurance,
20 manats for mandatory health insurance.
This leaves the employee with a net salary of 859 manats.
Fiscal Goals and Economic Impact
Experts say the reform aims to broaden the tax base and create a more balanced fiscal framework between sectors, particularly as Azerbaijan diversifies beyond oil revenues.
While the new mechanism is expected to boost budget revenues, economists warn that its short-term impact on household consumption and private-sector employment may be significant. The first few months of 2026 will serve as a real-time stress test for how both businesses and workers adapt to the new taxation model.
