Calculation of basic exemption

The overall basic exemption applied on all types of income is up to 6000 euros per year, i.e. up to 500 euros per month.

Calculation of basic exemption:

  • annual income up to 14 400 euros gives 6000 euros as annual basic exemption,
  • in case annual income increases from 14 400 euros to 25 200 euros basic exemption decreases according to the following formula: 6000 – 6000 ÷ 10 800 × (income amount – 14 400),
  • if annual income is above 25 200 euros, basic exemption is 0.

It is possible to check how basic exemption is taken into account in the course of the year in the Tax and Customs Board’s online services environment e-MTA under "My income".

Annual income includes:

  • income taxable with income tax (incl. foreign income)
  • remuneration received abroad and other income and dividend, which are not taxed with income tax in Estonia
  • dividend or other payments made from the equity, which are taxed at the company level at a standard tax rate 20/80
  • an amount taxed according to Simplified Taxation of Business Income Act and reduced by social tax

Remuneration and other fees (holiday pay, support, sickness benefit etc.), service fees received on the basis of a contract under the law of obligations, business income, gains from transfer of property, rental income, royalties, interest, dividends, taxable state pension (I pillar), payments from supplementary funded pensions (III pillar), which has been taxed with 20% tax rate, benefits, scholarships and grants, awards, compensations or other income are considered annual income.

Dividends (which are taxed at the company level at a standard tax rate 20/80) received from an Estonian company will be taken into account in the amount received (money received by a person). At the same time, income tax may be withheld and paid on dividends received from a foreign company. Dividends received from a foreign company will be taken into account in gross amount.

Annual income does not include:

  • compensations, benefits, scholarships and grants exempt from tax, and
  • tax exemptions (for example sale of housing or transfer of movable property in personal use), which are not declared in a natural person’s income return;
  • payments from mandatory funded pensions (II pillar) and supplementary funded pensions (III pillar) exempt from tax;
  • payments (incl. compensation) from mandatory funded pensions (II pillar), which have been taxed with 20% or 10% tax rate and 
  • payments from supplementary funded pensions (III pillar), which have been taxed with 10% tax rate.
     


Examples
An employee whose gross salary in a calendar year is 1000 euros per month receives 12 000 euros as annual income. In this case 500 euros per month or 6000 euros per year is tax free.

An employee, whose monthly gross salary is 1000 euros and old-age pension is 425 euros, receives 17 100 euros per year (12 000 + 5100). In this case 4500 euros per year is tax free.

Basic exemption

Application for basic exemption

Only one employer (the withholding agent) can apply basic exemption on the basis of a person’s application. An employee who works at several jobs must take into account that he/she is entitled to use the basic exemption on one job only.

An employed pensioner who receives both a pension and a salary of less than 500 euros, is entitled to apply the basic exemption at two places and submit an application both to the employer and the Social Insurance Board. It is important to keep in mind that a pensioner employed may divide the basic exemption in the amount of 500 euros between the employer and the Social Insurance Board.

The application has to authorize the withholding agent:

  • to calculate the basic exemption or
  • not to calculate the basic exemption or
  • to calculate the basic exemption in a specific amount, e.g. 100 euros per month.

The withholding agent can apply the basic exemption on a monthly basis. The amount of basic exemption is calculated according to the amount of an employee’s gross salary or other fees.

For example, in case of the following gross income, the basic exemption is calculated as follows:

It is also necessary to consider that in case income received from several sources (salary, pension or other income) exceeds 1200 euros per month, monthly tax calculation will not give the same result as annual tax calculation.

Example
A person’s gross salary is 1200 euros every month, basic exemption is applied in the amount of 500 euros per month. If this person sells immovable property in February and earns 12 000 euros profit on it and receives dividends in the amount of 3000 euros in June, the person’s total annual income is 29 400 euros. If this person’s employer has applied basic exemption every month, the person has to pay additional income tax according to the annual income tax return by 1 October next year.

Therefore, in a case where the annual income is within the range of 14 400 – 25 200 euros, it is important for people:

  • to think through their monthly income (e.g. salary, pension, rental income etc.) and other expected income (e.g. gains from selling immovable property or securities etc.) by the beginning of the calendar year, and
  • considering their expected annual income, to decide on whether to apply for basic exemption and
  • notify the withholding agent (an employer, the Social Insurance Board) on their decision to:
    - not use the right of basic exemption or
    - use the right of monthly basic exemption in a smaller amount than 500 euros.

It is recommended to submit one basic exemption application per year. In case of variable income it is possible to change the application once a month or withdraw it for applying basic exemption in a smaller amount or not applying it at all. If the basic exemption is applied monthly in a bigger amount than the total income enables to, a person has to pay additional income tax according to income tax return by 1 October next year.

If basic exemption is not applied at all when withholding income tax or the possible basic exemption amount has not been used throughout the year, the overpaid income tax amount will be refunded to the person according to the annual income tax return by 1 October next year at the latest.

Basic exemption: e-service “My income”

Important details of basic exemption calculation

The amount of basic exemption depends on your income. As the basic exemption decreases when your income increases, it is important to know how earned income, pension, benefits and other income affect your basic exemption.

By knowing the estimated amount of your annual income, you have the opportunity to apply basic exemption in a correct amount during the current year and avoid paying additional income tax by 1 October next year.
 

How does the following affect basic exemption

If you receive a gross income of more than 1200 euros in total each month from several employers, you have to add the gross earned income amounts and calculate the according basic exemption amount.

As the employer does not know your other income and therefore cannot take it into account (e.g. gross earned from another employer), you have to inform one employer of your wish to not use the basic exemption or to use the basic exemption in a smaller amount than 500 euros.

Example
If you earn a gross salary of 1000 euros per month from both of your two workplaces, you have the right to apply basic exemption in full (500 euros) in one workplace and income tax will be withheld from only 500 euros. In the second workplace, basic exemption is not applied and income tax is withheld from 1000 euros.

According to the income tax return, your annual income is 24 000 euros, in which case the annual basic exemption amount is 666.62 euros and you will have to pay additional income tax by 1 October next year.

In order to avoid such a situation you should inform your employer that you do not want to apply basic exemption at all or to apply it, for example, in the amount of 55 euros per month.

 

NB!

  • Basic exemption can be applied in only one workplace!
  • If your gross salary from several employers is more than 2100 euros a month, you do not have the right to use basic exemption.
    Ask the employer who has calculated your basic exemption so far to calculate it as 0 euros from now on or do not submit the application for basic exemption at all in the future.
  • If you work for more than one employer at the same time, the monthly social tax must be paid by the employer who you have chosen to apply the basic exemption upon withholding income tax. It is therefore especially important in a situation where there is more than one employer to submit the basic exemption application where you ask the employer to apply the basic exemption of 0 euros.

If you already know that your income may change during the year or you might receive a bonus or performance pay etc., it is reasonable to be conservative when applying the basic exemption.

Even when the basic exemption formula allows you to calculate, for example, 200 euros per month as basic exemption, then it might be wise to submit an application to your employer for applying, for example, 100 euros of basic exemption per month. This way you can avoid paying additional income tax according to income tax return by 1 October.

If you have paid more income tax during the year, you will receive the overpaid income tax refund (according to income tax return submitted by 30 April). This is also the case when you ask for the employer not to apply your basic exemption at all.

If you are a working pensioner who, in addition to earned income, receives pension from the Social Insurance Board (incl. old-age pension, survivor’s pension, pension for incapacity for work, special pensions and pension supplements) in monthly total of over 1200 euros, you have to sum up the gross earned income and pension and find the corresponding basic exemption amount.

An employed pensioner who receives both a pension and a salary of less than 500 euros, is entitled to apply the basic exemption at two places and submit an application both to the employer and the Social Insurance Board.

It is important to keep in mind that an employed pensioner may divide the basic exemption in the amount of 500 euros between the employer and the Social Insurance Board.

Example
A person’s pension is 416 euros and earned income is 300 euros. This person has the right to submit a basic exemption application to the Social Insurance Board for using 416 euros and another application to the employer for using 84 euros.

When there is a likely possibility to receive sudden additional income (e.g. gain from sale of immovable property, transfer of securities), you may mark a smaller amount on your basic exemption application. This way you can avoid paying additional income tax by 1 October next year.

NB!

Pension for incapacity for wor paid by the Social Insurance Board is included in the calculation of annual income and affects the size of basic exemption.

Work ability allowance paid by the Unemployment Insurance Fund, on the other hand, is a tax exempt allowance and is not included in the calculation of annual income nor affects the size of basic exemption.
 

Additional information

In case you are a pensioner and you do not have any other income in addition to pension (incl. old-age pension, survivor’s pension, pension for incapacity for work, special pensions and pension supplements), the overall basic exemption rate of 500 euros is applied.

The basic exemption amount affects working pensioners and receivers of special pensions, whose monthly income exceeds 1200 euros.

NB!

It is important to submit the basic exemption application to the Social Insurance Board. This can be done on the eesti.ee website and at the customer service bureaus of the Social Insurance Board.

If you are on parental leave and receive parental benefit, then this is your taxable income. If your monthly parental benefit does not exceed 1200 euros, then you have the right to use the basic exemption of 500 euros per month. If your parental benefit exceeds 1200 euros, the basic exemption is applied according to the Income Tax Act.

NB!

If you have already submitted your basic exemption application to the Social Insurance Board and have no other income, the Social Insurance Board considers and calculates the correct basic exemption and you do not have any additional obligations.

State benefits (child allowance, childbirth allowance, child care allowance) paid by the Social Insurance Board are exempt from tax and are not declared in the income tax return.

NB!

Tax exempt benefits are not included in annual income calculation and do not affect the amount of basic exemption.

Work ability allowance and unemployment allowance paid by the Unemployment Insurance Fund are exempt from tax and are not declared in the income tax return. Tax exempt benefits are not included to annual income calculation and do not affect the size of basic exemption.

NB!

There is a difference with the pension for incapacity for work paid by the Social Insurance Board. Pension for incapacity for work is a person’s taxable income, which is included in the annual income calculation and affects the size of basic exemption.

Unemployment insurance benefits received from the Unemployment Insurance Fund are your taxable income.

If your monthly benefit does not exceed 1200 euros, then you have the right to use the basic exemption of 500 euros per month. If your benefit exceeds 1200 euros, the basic exemption is applied according to the Income Tax Act.

NB!

If you have already submitted your basic exemption application to the Unemployment Insurance Fund and have no other income, the Unemployment Insurance Fund considers and calculates the correct basic exemption and you do not have any additional obligations.

Dividends received during a year, which are taxed by the company at the standard rate of 20/80, are considered income and are included in your annual income calculation. Received dividend amount (the amount paid to you) is included in the annual income calculation of your income tax return (table 7.1) and this affects the basic exemption amount.

If you have received dividends from abroad, from which income tax has been withheld or paid abroad, the gross amount of dividends (the amount which includes withheld or paid taxes) is included in your annual income calculation.

If, during a year, you receive dividends which are taxed by the company at a lower tax rate of 14/86 and 7% of the income tax is withheld, it is your taxable income which also affects the amount of basic exemption.

The amounts received on the Entrepreneur Account, from which social tax has been deducted, are considered as annual income and affect the basic exemption.

Additional information

If you receive gains from transfer of property (transfer of immovable property, transfer of securities, right to cut standing crop or felled timber etc.), then this is your taxable income which affects your basic exemption amount.

If you know in advance that you are going receive gains from transfer of property in addition to earned income and/or pension during the year, you have the opportunity to inform your employer or the Social Insurance Board, to whom you have submitted the basic exemption application, that you wish to partially or entirely give up the right to apply basic exemption.

NB!

Tax exempt sale of dwelling or movable property in personal use is not declared on income tax return and this income is not included in annual income calculation.

Taxation of the payments from mandatory funded pensions depends on payment conditions and payments may be either exempt from tax or taxed with 20% or 10% income tax rate.

Read more: “Taxation of pensions from 1 January 2021”.

Tax-free payments from mandatory funded pensions are not declared in the income tax return of a natural person, these are not taken into account as a person’s annual income, and these do not affect the size of the basic exemption.

State pension (I pillar) received from the Social Insurance Board and payments from mandatory funded pensions (II pillar) received from the Estonian Funded Pension Registry or from an insurance company are your taxable income, which are also declared in the income tax return. There is a difference that the state pension is taken into account in your annual income calculation and it affects your basic exemption amount, but payments from mandatory funded pensions (II pillar) are not considered your annual income and these do not affect the size of your basic exemption amount.

As before, it is possible to deduct contributions to supplementary funded pension (III pillar) in the extent of 15% of a person’s income taxable in Estonia or up to 6000 euros per year.

Taxation of the payments from supplementary funded pension depends on payment conditions and may be either exempt from tax or taxed with 20% or 10% income tax rate.

Read more: “Taxation of pensions from 1 January 2021”.

Tax-free payments from supplementary funded pension are not declared in the income tax return of a natural person, these are not taken into account as a person’s annual income, and these do not affect the size of basic exemption.

Payments from supplementary funded pensions (III pillar) taxed with 20% or 10% tax rate and received from the Estonian Funded Pension Registry or from an insurance company, are your taxable income, which are also declared in the income tax return. There is a difference that the payments taxed with 20% are considered your annual income and these affect your basic income amount, but the payments taxed with 10% are not considered your annual income and these do not affect the size of your basic exemption amount.

Last updated: 19.11.2021

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