Income tax and the tax-free allowance in Estonia

What is the income tax rate and what income does it cover?

The income tax rate is 22%, except in cases the Act names separately (TuMS § 4 lg 1) [1]. The tax period for an individual's income tax is the calendar year (TuMS § 3 lg 1) [5].

A person is resident if their place of residence is in Estonia or if they stay in Estonia for at least 183 days within 12 consecutive calendar months (TuMS § 6 lg 1) [6]. A resident individual pays income tax on all income received both in Estonia and outside Estonia (TuMS § 6 lg 1) [6]. What is taxed is income after the deductions permitted by law (TuMS § 1 lg 1) [7].

Taxable income includes, among other things, employment income, business income, rental income, interest, and pensions, scholarships and benefits (TuMS § 12 lg 1) [8]. All monetary payments received for work are taxed as employment income, including wages, holiday pay and sickness benefit (TuMS § 13 lg 1) [9], as are fees paid under a contract for work, a contract for services or another law of obligations contract (TuMS § 13 lg 1¹) [9].

How large is the tax-free allowance?

A tax-free allowance of 8400 euros is deducted from a resident individual's income for the tax period (TuMS § 23 lg 1) [2]. This amount does not apply from the tax period in which the person reaches old-age pension age (TuMS § 23 lg 1) [2]. From that tax period, a tax-free allowance of 9312 euros is deducted from taxable income (TuMS § 23⁵ lg 1) [4].

If a person was not resident for the whole year, the tax-free allowance may be deducted in proportion to the number of months during which they were resident (TuMS § 44 lg 1²) [10].

How is the tax-free allowance applied to your salary?

A withholding agent is, for example, an employer or a resident legal person that makes payments to an individual that are subject to income tax (TuMS § 40 lg 1) [11]. Income tax is withheld from, among other things, salary and other remuneration and from fees paid under a contract for work, a contract for services or another law of obligations contract (TuMS § 41 p 1 and 3) [12]. The tax is withheld when the payment is made (TuMS § 40 lg 2) [11].

• Application. The tax-free allowance is applied monthly on the basis of the taxpayer's written application, up to one twelfth of the annual allowance per month (TuMS § 42 lg 1) [3].
• Several payers. If you receive taxable income from several withholding agents, you can submit the application to only one withholding agent of your choice (TuMS § 42 lg 2) [3]. Exception: if you receive income at the same time from the Social Insurance Board (Sotsiaalkindlustusamet) and from a payer of salary, you may apply to both, but the allowance stated in the applications may not exceed one twelfth of the annual amount in total; this exception does not apply to a person who has reached old-age pension age (TuMS § 42 lg 2³) [3].
• Benefits. The tax-free allowance is not deducted when tax is withheld from payments made under the Health Insurance Act (ravikindlustuse seadus) (TuMS § 42 lg 2⁴) [3].
• Other deductions. Before the tax to be withheld is calculated, the unemployment insurance contribution and the mandatory funded pension contribution withheld from the payment are also deducted (TuMS § 42 lg 5 and 6) [3].

If the tax-free allowance was applied in a larger amount than allowed, the Tax and Customs Board (Maksu- ja Tolliamet) may notify the withholding agent (TuMS § 42 lg 8) [3]. The withholding agent transfers the withheld income tax to the Board's bank account by the 10th day of the month following the month of payment (TuMS § 40 lg 4) [11].

What changes at pension age?

From the tax period in which a person reaches old-age pension age, the Social Insurance Board deducts from their pension each calendar month, before calculating the tax, one twelfth of the 9312 euro tax-free allowance (TuMS § 42 lg 1³; TuMS § 23⁵ lg 1) [3] [4]. If the pension together with the funded pension payments named in the Act is smaller than that, the difference is deducted by another payer, such as the payer of salary, on the basis of the taxpayer's written application (TuMS § 42 lg 1³) [3].

Do I have to file an income tax return?

The income tax return must be filed with the Tax and Customs Board by 30 April of the year following the tax period; through the e-service it can be filed from 15 February of the following year (TuMS § 44 lg 1) [10]. The Board pre-fills the return with the data it holds, including the deduction of the tax-free allowance; the taxpayer must check the data and, if needed, file a corrected return (TuMS § 44 lg 1¹) [10].

A resident individual whose income did not exceed the tax-free allowance, or who does not have to pay additional income tax, does not have to file a return (TuMS § 44 lg 6 p 1) [10]. Among others, a sole proprietor (füüsilisest isikust ettevõtja, FIE) and a person who made payments into or withdrawals from an investment account during the tax period file a return in any case (TuMS § 44 lg 6¹ p 1 and 2) [10].

Tax withheld during the year is deducted from the total tax for the year (TuMS § 46 lg 2) [13]. Any additional tax must be paid by 1 October of the following calendar year, and the Board refunds overpaid tax by the same date (TuMS § 46 lg 3 and 6) [13].

What the law says

• „Residendist füüsilise isiku maksustamisperioodi tulust arvatakse maha maksuvaba tulu 8400 eurot.“ [2] (translation: a tax-free allowance of 8400 euros is deducted from a resident individual's income for the tax period; TuMS § 23 lg 1) – this is an annual amount; no more than one twelfth of it is applied to your salary per month (TuMS § 42 lg 1) [3].
• „Nimetatud maksuvaba tulu ei kohaldata alates maksustamisperioodist, kui füüsiline isik jõuab vanaduspensioniikka.“ [2] (translation: this tax-free allowance does not apply from the tax period in which the individual reaches old-age pension age; TuMS § 23 lg 1) – a separate amount applies to them (TuMS § 23⁵ lg 1) [4].
• „arvatakse maksumaksja kirjaliku avalduse alusel igas kalendrikuus enne kinnipeetava tulumaksu arvutamist maha mitte rohkem kui üks kaheteistkümnendik“ [3] (translation: on the basis of the taxpayer's written application, no more than one twelfth is deducted each calendar month before the tax to be withheld is calculated; TuMS § 42 lg 1) – without an application, the allowance is not applied to your monthly salary.
• „võib ta lõikes 1 nimetatud avalduse esitada ainult ühele enda valitud tulumaksu kinnipidajale“ [3] (translation: they may submit the application to only one withholding agent of their choice; TuMS § 42 lg 2) – if you have several jobs, choose one.
• „Tulumaks peetakse kinni väljamakse tegemisel.“ [11] (translation: income tax is withheld when the payment is made; TuMS § 40 lg 2) – the tax is calculated with each salary payment.

What to do

1. Choose which payer (for example, your main job) will apply your tax-free allowance and give them a written application (TuMS § 42 lg 1 and 2) [3].
2. If you receive income at the same time from the Social Insurance Board and from a payer of salary, you may split the allowance between them, but not above one twelfth per month in total; this does not apply once you have reached old-age pension age (TuMS § 42 lg 2³) [3].
3. Ask the withholding agent for a certificate of the year's payments and the tax withheld; they must issue it by 1 February of the following year, or with the final settlement when you leave the job (TuMS § 40 lg 6) [11].
4. From 15 February, check the pre-filled return and file it, or a corrected return, by 30 April (TuMS § 44 lg 1 and 1¹) [10].
5. If you want to deduct training costs or donations, keep the documents proving them (TuMS § 26 lg 2; TuMS § 27 lg 1) [14] [15].
6. If the return shows additional tax to pay, pay it by 1 October (TuMS § 46 lg 3) [13].

Frequently asked questions

Is the tax-free allowance applied automatically?

To your monthly salary it is applied on the basis of your written application (TuMS § 42 lg 1) [3]. The Tax and Customs Board pre-fills the annual return including the deduction of the allowance (TuMS § 44 lg 1¹) [10]; the Board refunds overpaid tax by 1 October of the following year (TuMS § 46 lg 3 and 6) [13]. For people of pension age, the Social Insurance Board deducts the allowance from the pension (TuMS § 42 lg 1³) [3].

I have two jobs. Can I use the tax-free allowance at both?

You can submit the application to only one withholding agent of your choice (TuMS § 42 lg 2) [3]. If more allowance is applied than permitted, the Tax and Customs Board may notify the withholding agent (TuMS § 42 lg 8) [3], and the missing tax must be paid as additional tax after the end of the year (TuMS § 46 lg 3) [13].

Is sickness benefit taxable?

Sickness benefit is employment income subject to income tax (TuMS § 13 lg 1) [9]. The tax-free allowance is not deducted when tax is withheld from payments made under the Health Insurance Act (TuMS § 42 lg 2⁴) [3].

Do I have to file a return if all the tax was withheld from my salary?

No, if your income did not exceed the tax-free allowance or if you do not have to pay additional income tax (TuMS § 44 lg 6 p 1) [10]. Among others, a sole proprietor and a person who made payments into or withdrawals from an investment account must file a return in any case (TuMS § 44 lg 6¹ p 1 and 2) [10].

How much can I deduct for training costs and donations?

Training costs, and gifts and donations to associations named in the Act may be deducted for the tax period up to 1200 euros in total per taxpayer, but not more than 50% of the taxpayer's income taxable in Estonia for the same period (TuMS § 28² lg 1) [16]. Contributions to supplementary funded pension insurance and voluntary pension funds have a separate limit: up to 15% of taxable income, but not more than 6000 euros (TuMS § 28 lg 2) [17].