Beginning from 1 January 2018 the overall tax-free amount (basic exemption) of up to 6000 euros per year or up to 500 euros per month will be applied on all types of income and the increased basic exemption on pension and compensation for accident at work will not be applied in the future.
In year 2018:
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)
- Salary/Wage and Tax Calculator www.kalkulaator.ee/en/salary-calculator
- Calculator "Amount of tax-free income 2018" www.kalkulaator.ee/en/amount-of-tax-free-income-2018
Income amount consists of earned income and other revenues, service fees received on the basis of a contract for services, business income, gains from transfer of property, rental income, royalties, interest, dividends, taxable pensions, benefits, scholarships and grants, awards, compensations or other income.
Gross salary from which income tax, unemployment insurance premiums and contributions to mandatory funded pension are withheld, as well as other gross payments taxed by withholding income tax, are considered income amount.
Therefore, with the annual income of 17 100 euros, basic exemption 4500 euros is calculated as follows:
- 17 100 – 14 400 = 2700
- 6000 ÷ 10 800 = 0,55556
- 0,55556 × 2700 = 1500
- 6000 – 1500 = 4500 euros
For example, annual income 19 800 euros gives 3000 euros as basic exemption and annual income 22 500 euros gives 1500 euros as basic exemption.
What is considered annual income?
Income taxable with income tax (incl. foreign income)
Earned income 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
An amount taxed according to Simplified Taxation of Business Income Act and reduced by social tax
Earned income and other revenues (holiday pay, support, sickness benefit etc.), service fees received on the basis of a contract for services, business income, gains from transfer of property, rental income, royalties, interest, dividends, taxable pensions, benefits, scholarships and grants, awards, compensations or other income are considered annual income.
Tax free compensations, benefits, scholarships and grants 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, are not considered annual income.
In year 2018 dividends 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.
An employee whose gross salary in year 2018 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.
Application for basic exemption
Basic exemption can only be calculated and applied by one employer (the withholding agent) according to a person’s application. An employee who works at several jobs shall have to take into account that he/she is entitled to use the basic exemption on one job only.
A pensioner employed, who receives a pension and a salary less than 500 euros, is entitled to use 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 view that a pensioner employed may divide the basic exemption in the amount of 500 euros between the employer and the Social Insurance Board.
The pension of a person is 416 euros and the salary is 300 euros. The person has the right to submit an application to the Social Insurance Board for the use of the basic exemption amounting to 416 euros and an application to the employer for the use the basic exemption in the amount of 84 euros.
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.
Applying the basic exemption on a monthly and an annual basis
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.
Therefore, 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, monthly tax calculation will not give the same result as annual tax calculation.
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.
Thus, in case the annual income is within the range of 14 400 – 25 200 euros, it is important for a person:
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.) 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 to 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.
In case the basic exemption is monthly applied in a bigger amount than the total income enables to, a person has to pay additional income tax according to income tax return.
If basic exemption is not applied at all by 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.