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Important details of basic exemption calculation

In 2018 your basic exemption amount 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 size of your income in 2018, you have the chance to have your basic exemption calculated in correct amount during the current year and to avoid paying additional income tax by 1 July 2019.

How the following affect the basic exemption

Several jobs

In case 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 these into account (e.g. gross earned from another employer), then you have to inform one employer on your wish to not use the basic exemption or to use the basic exemption partially.

For example, if you earn 1000 euros in both of your two workplaces, you have the right to use the maximum basic exemption (500 euros) in one workplace and income tax will be withheld on 500 euros. The other workplace will not calculate basic exemption and income tax will be withheld on 1000 euros. According to the income tax return, annual income amount is 24 000 euros and the according annual basic exemption amount is 666.62 euros which means that you have to pay additional income tax by 1 July 2019. To avoid this situation you should inform your employer of your wish not to use basic exemption at all or to use it, for example, in the amount of 55 euros per month.

Basic exemption can only be applied in one workplace! If your gross earned income in several workplaces is more than 2100 euros in total, then you do not have the right to use basic exemption. Ask your employer, who has applied your basic exemption up to now, to calculate it as 0 euros from now on or do not submit the application for basic exemption at all in the future.

In case you work in several places at the same time, social tax according to monthly rate is paid by the employer who you have chosen to apply your basic exemption when withholding income tax. It is therefore important to submit the basic exemption application in a situation of having multiple workplaces and wishing for the employer to apply the basic exemption of 0 euros.

Changing earned income

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 July 2019. If you have paid more income tax during the year, you will receive the overpaid income tax refund (according to income tax declaration submitted by 1 April 2019). This is also the case when you ask for the employer not to apply your basic exemption at all.

Pension received from the Social Insurance Board in addition to earned income

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.

A working pensioner, whose pension and earned income are under 500 euros, has the right to apply the basic exemption in two places and submit the application to both the employer and the Social Insurance Board.

It is important to keep in mind that a working pensioner can divide his/her basic exemption between the employer and the Social Insurance Board in the extent of 500 euros.

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 on 1 July 2019.

Pension for incapacity for work 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.

Pension received only from the Social Insurance Board

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. A pensioner with no other income in addition to pension is not affected by the basic exemption change, because the new basic exemption rate is higher than the sum of the 2017 overall basic exemption and the increased basic exemption. The change affects working pensioners and receivers of special pensions, whose monthly income exceeds 1200 euros.

It is important to submit the basic exemption application to the Social Insurance Board. This can be done in the eesti.ee portal and in the client service bureaus of the Social Insurance Board.

Parental benefit received from the Social Insurance Board

In case 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. In case your parental allowance exceeds 1200 euros, the basic exemption is applied according to the Income Tax Act.

When 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.

Child allowance, childbirth allowance, child care allowance received from the Social Insurance Board

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.

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

Work ability allowance and unemployment allowance received from the Unemployment Insurance Fund

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.

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

Unemployment insurance benefits received from the Unemployment Insurance Fund are your taxable income. In case the benefit does not exceed 1200 euros per month, you have the right to use the monthly basic exemption in the amount of 500 euros. If the monthly benefit exceeds 1200 euros, the basic exemption is applied according to the Income Tax Act.

When you have already submitted your basic exemption application to 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.

Dividend received from a company

Dividends received during a year are considered income and 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 for year 2018.

At the same time, 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.

Unexpected income during the year

When 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 can already expect to receive gains from transfer of property during the year in addition to earned income and/or pension, then you have the possibility 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 discard the basic exemption application.

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

II pension pillar

Taxation of mandatory funded pension, i.e. II pension pillar payments, does not change in 2018. State pension received from the Social Insurance Board (I pillar) and mandatory funded pension received from Pension Centre or insurance company (II pillar) is your taxable income, on which the general rate of basic exemption is applied.

In case the total amount of your state pension and mandatory funded pension is up to 1200 euros per month and you do not have any other income (e.g. earned income), then you have the right for basic exemption of 500 euros per month. If your monthly income is higher, then basic exemption is applied according to the Income Tax Act.

Social Insurance Board exchanges information with the Pension Centre for applying basic exemption. If you have submitted the basic exemption application to the Social Insurance Board, then the Social Insurance Board will apply basic exemption and transmits the information to the Pension Centre. The Pension Centre will apply the basic exemption in the extent of the unused part.

III pension pillar

In 2018 the rules for deducting contributions to supplementary funded pension, i.e. III pension pillar contributions, from taxable income do not change. It is continually possible to deduct contributions to supplementary pension (III pillar) in the extent of 15% from a person’s income taxable in Estonia or up to 6000 euros per year.

Taxation of supplementary funded pension payments, i.e. III pension pillar payments, also does not change in 2018. The taxation of supplementary funded pension payments depends on payment conditions and may be exempt from tax or taxed with income tax at the rate of 10% or 20%. More information on supplementary funded pension payments on the website of Pension Centre, article “Taxation of payments”.

Tax exempt supplementary pension payments are not declared on the income tax return and this income is not included into annual income calculation nor does it affect a person’s basic exemption amount.

However, the taxable payments of supplementary funded pension are declared on income tax return. Beginning from year 2018 the supplementary funded pension payments are taxed either with 10% or 20% income tax rate and this tax rate does not change in the income tax return. It is necessary to consider that the supplementary funded pension payments declared in the income tax return and taxed with 10% or 20% income tax rate will be included in the annual income calculation and thereby affect the size of a person’s basic exemption amount.

October 2017

28.11.2019