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Know this about how YEL income is calculated

The specialists at Suomen Yrittäjät stress that the calculator used in determining YEL income is just an aid that should not be relied on too much.

The round of reviews of YEL income following amendments to the YEL legislation has got business owners talking about how YEL income (the figure on which YEL premiums are based) is calculated.

One tool which the pension providers use is the YEL Income Calculation Service, which the Finnish Centre for Pensions published in September 2022.

Suomen Yrittäjät has previously criticized the calculator, as it completely omits the business owner’s own labour input into the company, for example.

“We get the strong impression that the result the calculator gives is only in line with the law if you’re lucky,” Harri Hellstén commented in the autumn.

In a recent blog postHarri Hellstén, Labour Market Affairs Manager, and Janne Makkula, a Vice President, of Suomen Yrittäjät, the Finnish SME association, described the challenges of the calculator in more detail.

 “The service is (even in the view of the Finnish Centre for Pensions itself) only an aid when evaluating the value of the labour input. Setting the YEL income is always the pension provider’s responsibility, and when the provider does so, it must consider all the factors it is aware of that affect its evaluation,” the pair write.

We have previously reported on the current YEL income review process here and here. When reviewing YEL incomes, the pension providers use the calculator’s result as a basis for the recommended new YEL incomes that they send business owners. The calculator’s result is based on past turnover and data on average turnover and salaries in that sector. The information is supplemented with data from the Tax Administration.

“It is extremely important for both business owners and the employees of the pension providers reviewing YEL incomes to understand one thing: the calculator’s result is not the YEL income in line with the Entrepreneur’s Pension Act. That is because by law, the YEL income must be equivalent to the salary that ought to be paid to a person outside the business for doing the same work as the business owner,” Makkula and Hellstén write in their blog.

Instructions for business owners on reviews of YEL incomes

By law, pension providers must hear the business owner’s opinion on their YEL income. Makkula and Hellstén write that the value of the business owner’s labour input cannot be read directly in the turnover or the business’s other key figures.

“That is why it is important for each business owner to respond to their proposed new YEL income and to inform their pension provider about their personal and business situation. When they receive the proposed new YEL income, the business owner can give the pension provider additional information on matters which affect the financial value of their labour input. In that case, the pension provider must evaluate the impact of the new information provided by the business owner on the YEL income,” the blog post says.

By law, pension providers must hear the business owner’s opinion on their YEL income.

We previously reported on a business owner who received an “arbitrary” proposed new YEL income. In that case, the pension provider had used a company on the board of which they had sat for a few years without any ownership, honorarium or other compensation when evaluating their business’s turnover. To cap it all, the business owner had left the board earlier this year.

Suomen Yrittäjät has also learned of cases in which the calculator and its recommendation have considered the turnover of all the companies that the business owner has been involved with in any way. This was done based on the business owner’s personal ID.

“Yes, the YEL pension insurance must consider all the business activities in which the entrepreneur is in the position of business owner by law. However, to be considered a business owner, they have to have enough personal responsibility and a management position or ownership in the company. It continues to be the case that the person has to actually work in the business for these conditions to be met and for the business to be considered in their YEL,” the Suomen Yrittäjät specialists write in their blog post.

The pair point out that the proposed YEL income and any decision made on the basis of it are illegal if they consider business activities which are not covered by YEL insurance.

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Pauli Reinikainen