Colombia presents a significant opportunity for international investors seeking talent. Its large, young, increasingly educated, and technologically adaptable workforce is the second largest in South America after Brazil – over 26 million as of 2024. 

This demographic advantage is enhanced by Colombia’s strategic location, providing easy access to North and South American markets, and its extensive network of 17 Free Trade Agreements spanning over 60 countries. 

Furthermore, the Colombian government actively promotes formal employment and implements ongoing tax and labor reforms, solidifying the country’s position as a true competitive regional hub.

You want a piece of the pie? Doing business in Colombia, strategic as it may be, requires a thorough understanding of the extensive payroll and income tax framework to capitalize on the workforce advantages while ensuring compliance. And like you’re about to learn, despite the numerous perks, it does come at quite a cost to employers. 

Let’s dive in!

What is Payroll Tax in Colombia?

In Colombia, payroll tax isn’t a single, unified tax, but rather a collection of mandatory contributions that both employers and employees are required to make to fund the country’s social security system and parafiscal programs.

Social Security Contributions

These contributions are governed by Law 100 of the 1993 Colombian Pension Reform, mainly covering health insurance, pensions, and other labor risk insurances. Before then, Colombia ran on the Pay-As-You-Go (PAYG) pension system.

The reform introduced a privately administered, fully funded system alongside the existing state scheme. This shift partially replaced the PAYG with individual accounts managed by private funds – Administradoras de Fondos de Pensiones y Cesantías (AFPs), creating a more flexible and efficient pension system through private competition and individual savings management. 

Here’s a breakdown of what the social security contributions contain:

Scheme
Employers’ Contribution (%)
Employees’ Contribution (%)
Total (%)
Pensions
12
4
16
Health Care
8.5
4
12.5
Labor Risk (ARL)
0.522 – 6.96
–
Varies
Total
21 – 27.46
8
Varies

In Colombia, employers are legally required to contribute to Administradora de Riesgos Laborales (ARL) insurance for work-related risks. This contribution, ranging from 0.522% to 6.96% of the employee’s salary based on the company’s risk level set by the ARL, is capped at 25 times the minimum monthly wage. Risk levels are categorized into classes.

Risk Category
Contribution Rate
Risk I
0.522%
Risk II
1.044%
Risk III
2.436%
Risk IV
4.350%
Risk V
6.960%

While it may seem that the difference between what employers and employees pay is wide enough to fit the Grand Canyon, Colombia does offer great business opportunities.

These contributions are mandatory for:

  • All formal employment relationships (indefinite, fixed-term, and temporary)
  • Both Colombian citizens and foreign workers with employment contracts in Colombia

Parafiscal Contributions

In Colombia, employers are also legally required to make parafiscal contributions, which are separate from standard taxes. These payroll-based contributions fund vital public institutions such as the Colombian Institute of Family Welfare (ICBF), the National Learning Service (SENA), and Family Compensation Funds (CCF). 

Employers typically remit these funds monthly, along with other tax and social security obligations, to the National Administrative Department of Taxes and Customs (DIAN). These contributions are so substantial, they contribute over 1% to Colombia’s GDP.

Here’s a breakdown of the parafiscal contributions:

Parafiscal Fund
Employer Share (%)
CCF
4%
SENA
2%
ICBF
3%
Total
9%

The parafiscal contributions are governed by Law 1607 of the 2012 Parafiscal Contributions Reform.

Solidarity and Subsistence Funds

Employees also get their custom invite to the party.

The Solidarity Pension Fund (Fondo de Solidaridad Pensional – FSP) is a redistributive mechanism where high-income-earning employees contribute an extra percentage of their salary to support low-income or non-contributing individuals.

The Subsistence Pension Fund, a sub-account of the Solidarity Fund, offers non-contributory pensions to poor, elderly individuals lacking sufficient pension contributions.

These payments are mandatory for all employees who earn 4 or more times the minimum monthly salary (SMLMV), with increasing rates per income level.

The rates currently range between an additional 1-2%:

Earnings (in SMLMV)
Contribution Rate (%)
4 – <16 SMLMV
1.0%
16 – <17 SMLMV
1.2%
17 – <18 SMLMV
1.4%
18 – <19 SMLMV
1.6%
19 – <20 SMLMV
1.8%
20+ SMLMV
2.0%

Personal Income Tax in Colombia

In addition to all the social security contributions, employers are also required to withhold employees’ personal income tax.

Colombia’s personal income tax (Impuesto sobre la Renta para Personas Naturales – IRPN) uses a progressive system based on annual income. These tax regulations vary depending on whether an individual is classified as a resident or non-resident for tax purposes.

For the most part, a person is considered a Colombian tax resident if he has spent more than 183 days in Colombia (consecutive or not) in any full year.

Income in Colombia is categorized into what is known as cedular systems, measured in Tax Value Units (UVT). 1 UVT = COP 49,799

Taxable Income Range (in UVT)
Tax Rate (%)
0 – 1,090 UVT
0%
1,091 – 1,700 UVT
19%
1,701 – 4,100 UVT
28%
4,100 – 8,670 UVT
33%
8,670 – 18,970 UVT
35%
18,970 – 31,000 UVT
37%
Over 31,000 UVT
39%

Residents are allowed to deduct certain expenses before calculating tax. Some of these deductions include:

  • 25% of labor income, capped at 790 UVTs
  • Mandatory social security contributions
  • Voluntary pension fund contributions
  • Prepaid medical expenses, education, and mortgage interest

Total deductions are capped at 40% of total income, up to a maximum of 5,040 UVTs.

If, for example, someone earns COP 200 million/year, their taxable income after deductions would be converted to UVTs and taxed progressively.

Meanwhile, non-residents are taxed at a flat rate of 35% on only Colombian-sourced income and can have no deductions or exemptions.

So many contributions, trying to figure them out on your own could make your head spin. Use our payroll calculator instead.

Employer and Employee Responsibilities

Colombian payroll and income tax involve shared responsibilities between the employer and employees.

Employer Responsibilities

  • Registration: Employers must register with DIAN and various social security entities, including pension, health, occupational risk, family welfare, SENA, and compensation funds.
  • Withholding and Contributions: They are responsible for calculating and withholding employee deductions for personal income tax (PIT), pensions, and health insurance. They also pay employer-only contributions for occupational risk premiums (based on job risk), SENA, ICBF, and the family compensation fund.
  • Monthly Remittance: These withholdings and employer contributions must be declared and remitted monthly, typically by the 13th of the following month, with exact dates varying by the employer’s tax identification number (NIT).
  • Annual Reporting: Employers must issue annual income and withholding certificates (Form 220) to each employee and file consolidated payroll reports with DIAN, usually by March of the following year.

Employee Responsibilities

  • Information Accuracy: Employees must ensure their personal and tax information, including details about dependents, additional income, or residency status, is accurate and complete.
  • Verification: They should review their payslips and annual certificates to confirm proper deductions.
  • Annual Tax Filing (if applicable): While most salaried workers have PIT withheld by their employers, individuals earning above a certain threshold (e.g., 1,400 UVT annually) must file an annual tax return between August and October, based on the last digits of their NIT or identification number.
  • Compliance for Additional Income: Colombian individuals with other income or self-employment must register with DIAN, make advance tax payments, contribute monthly to pension and health systems, and file annual returns online.

This collaborative framework ensures the efficient operation of Colombia’s tax and social security system.

Industry-Specific Tax Rates

While the standard corporate income tax (CIT) rate stands at 35%, the government offers sector-specific incentives that reduce the overall tax burden while contributing to national development goals.

For example, companies in the creative industries may benefit from up to 7 years of income tax exemption, provided they meet job creation and local reinvestment criteria.

IT companies are also eligible for deductions of up to 175% of Research and Development expenses from their taxable income, as long as projects are certified by the Administrative Department of Science, Technology, and Innovation.

Green energy projects, including solar, wind, and bioenergy, can claim a 100% income tax deduction on investments in environmental sustainability, as well as VAT and tariff exemptions on imported equipment.

In agriculture, rural and agribusiness investments can access a 20-year income tax exemption, especially in post-conflict zones. Similarly, tourism infrastructure projects in smaller municipalities may benefit from a 9% reduced income tax rate for 10 years.

For Free Trade Zone (FTZ) operators and businesses, a 20% flat CIT rate applies instead of the standard 35%, alongside customs and VAT exemptions for goods entering the zone. 

For more information and eligibility requirements, interested employers/investors should visit the Ministry of Commerce, Industry, and Tourism.

Colombia’s 2025 Pension Reform

Among other key updates, the 2025 Pension Law Reform will, from 1 July 2025, introduce a dual pension system governed by a new income threshold of 2.3 times the minimum monthly wage (SMLMV).

Under the new scheme, workers’ pension contributions will be split between the public and private pension systems based on their earnings:

  • Up to 2.3× the SMLMV, all pension contributions will go to Colpensiones, the state-run public pension fund.
  • Any excess income above that amount will be directed to private pension funds (AFPs).

This structure aims to blend the redistribution goals of the public system with the investment-driven approach of private funds.

Also, the FSP contributions will increase for employees earning 4× the SMLMV from 1-2% to 1.5 – 3%, depending on income brackets.