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Amount of tax-free income beginning from 1 January 2018

 

For the majority, 2018 will bring about a tax relief as the basic exemption amount is increased to 500 euros. These changes include various conditions that must be taken into account in order to avoid an obligation to pay additional income tax in 2019.

From the new year, an increased basic exemption will not be applied to pension and compensation anymore. The income tax rate will remain the same – 20%.

If your place of residence is not Estonia, you will not be affected by the income tax changes of 01.01.2018 and the taxation principles of your Estonian pension will remain the same as in 2017.

 

 

Income tax exemption rates

From the new year, the applicable overall tax-free amount can be divided into three major categories.

  • If your annual income is up to 14 400 euros or 1200 euros per month, you can use the maximum basic exemption that is 6000 euros per year or 500 euros per month.
  • If your monthly income is between 1200–2100 euros (annual income between 14 400–25 200 euros), your basic exemption will begin to increase and the closer it is to 2100 euros the lower it will be.
  • If your monthly income exceeds 2100 euros (over 25 200 euros per year), no basic exemption will be applied. Therefore, the monthly income of a pensioner with a higher income will be decreased by the maximum of 83.2 euros due to the changes.

As you need to know in which category you are in order to calculate the correct amount of tax-free income, we recommend to start thinking about your annual income in the first possibility. If you haven't taken into account all sources of income (e.g. income from the sale of an apartment or a bonus) at the beginning of the year, the calculated amount of tax-free income might turn out to be too high, meaning you will be obligated to pay additional income tax at the beginning of 2019.

  • In case of income between 1200-2100 euros, the monthly amount of tax-free income will be calculated by using the formula 500–500/900*(payment – 1200). The annual amount of tax-free income will be calculated by using the formula 6000 – 6000/10800 * (sum of annual income – 14400).
  • Use the calculator at webpage www.tulumaks.ee for calculating the correct amount of tax-free income.
 

 

Benefits paid by the Social Insurance Board that are exempt from taxation with income tax:

benefit for pensioners living alone

  • family allowances (including child allowance, child care allowance, childbirth allowance, single parent's child allowance, allowance for families with many children,  conscript's or person's in alternative service child allowance, guardianship or curatorship allowance, adoption allowance, start in independent life allowance)
  • compensation for additional costs related to compensation for damages (including prosthetic appliances, medical devices, prescription medicinal products, rehabilitation, travel costs to a medical institution, care expenses)
  • maintenance allowance (including maintenance allowance during court and execution proceedings)
  • social services for disabled persons (including disabled child allowance, disability allowance for a person of working age, disability allowance for a person of retirement age, disabled parent's allowance, education allowance, in-service training allowance)
  • repressed person's allowance
  • state support for winners of the Olympic Games
  • returnee allowance
  • state compensations paid for victims of crime
  • social rehabilitation services (including travel expenses benefit, special care service, technical aid)
  • compensation for psychological assistance costs (victim support)

EXAMPLE: A person is receiving a pension in the amount of 380 euros per month, an allowance for a disabled person of retirement age in the amount of 40.91 euros per month and, in October, received the one-time annual benefit for pensioners living alone in the amount of 115 euros. In this case the pensioner will only take into account the pension as their monthly income taxable with income tax. The allowance for a disabled person of retirement age and the benefit for pensioners living alone will not be included in their income as they are not taxable with income tax.

 

 

Benefits paid by the Social Insurance Board that are taxed with income tax 

  • Pension
  • Compensation for damages
  • Parental benefit (including the difference between parental and maternity benefit)

EXAMPLE: A person is receiving a pension for incapacity for work in the amount of 390 euros per month and a parental benefit in the amount of 470 euros per month. As both pension and parental benefits are taxable with income tax, the person must add up the sums to find out their monthly total income that is taxed with income tax. In case of current example, the total monthly income is 860 euros (390+470). The person has the right for monthly basic exemption in the amount of 500 euros. 

Benefits paid by the Social Insurance Board will be combined under one title

From 2018 pension, compensation for damages and parental benefit will not be viewed as separate benefits from which a person must choose one to be exempted from income tax.

Such benefits will be viewed as benefits taxed with income tax that are paid by the Social Insurance Board. This means that if a person is entitled to receive both pension and parental benefit and has submitted (or plans to submit) an application for exemption from income tax to the Social Insurance Board, said application will apply to all payments made by the Social Insurance Board.

EXAMPLE: A person is receiving a pension for incapacity for work in the amount of 350 euros and a parental benefit in the amount of 500 euros. From 01.01.2018, we will consider the income of the person to be 850 euros per month (350+500), meaning they have the right to receive the basic exemption in the amount of 500 euros per month. An additional exemption from income tax (236 euros per month) will be applied no more. The tax exemption will be applied to pension and parental benefit payments in a manner that the pension (350 euros) will be paid in full. The remaining amount of basic exemption in the sum of 150 euros (500-350) will be applied to the parental benefit. Now the person must remember that once their parental benefit payments end the application for receiving exemption from income tax will still be applied to their pension. If the person returns to work and wants their employer to apply the exemption from income tax to their salary, they must submit an application to the Social Insurance Board, requesting the application for exemption from income tax to be terminated, and another application to their employee for using the basic exemption.

Earnings included in annual income

  • dividend payment from an Estonian company or equity payment that is taxed on the company level
  • business income taxed on the grounds of the Simplified Business Income Taxation Act, from which the social tax of business income has been withheld
  • pension payments from the second and third pillar (read more on www.pensionikeskus.ee)

Antud loetelu ei ole lõplik. Rohkem infot saad maksu ja tolliameti kodulehelt.

The amount of income taken into account is the gross earnings, from which income tax, unemployment insurance premium and contribution to a mandatory funded pension will be withheld. The amount of income will also include other gross payments, which will be taxed by withholding income tax.

EXAMPLE: A person is receiving a pension in the amount of 500 euros per month and compensation for damages in the amount of 450 euros per month. In addition, payments are made to the person by the Pension Centre from their second pension pillar in the amount of 50 euros per month. As both pension, compensation for damages and payments from the second pension pillar are taken into account as income taxable with income tax, the person must add up the sums in order to calculate their total income taxable with income tax. In case of current example, the total income is 1000 euros per month (500+450+50). The person has the right to use the basic exemption in the amount of 500 euros per month without having to submit an additional application to the Pension Centre.

Earnings not included in annual income

  • allowances exempt from tax, benefits (substinence benefit, work ability allowance, compensation for using private car for business trips, etc.)
  • scholarships exempt from tax (a scholarship that meets all requirements and is paid by a non-profit association or foundation with income tax incentive);
  • income exempt  from tax earned in connection with the sale of assets (e.g. income from the sale of residential property or movable personal property);
  • fringe benefits taxed on the employer level.

The list is not final. Additional information can be acquired on the homepage of the Tax and Customs Board. 

EXAMPLE 1: A person earns a monthly salary of 1000 euros and receives pension for incapacity for work in the amount of 320 euros per month. Their total monthly income taxable with income tax is 1320 euros. As the income taxable with income tax exceeds 1200 euros per month, they have the right to use the basic exemption in the amount of 433 euros per month (500–(500/900)*(1320 – 1200)). In case of current example, the person must decide whether to use the basic exemption with their employer or with us, whereas they also have to take into account the fact that the income paid by the other place will be taxed from the first euro.

EXAMPLE 2: A person earns a monthly salary of 1000 euros and receives work ability allowance in the amount 220 euros per month. Their total monthly income taxable with income tax is 1000 euros. The person has the right to use the basic exemption in the amount of 500 euros per month. 

 

Working pensioner

When calculating their basic exemption, a working pensioner must primarily keep in mind their monthly gross income (pension, salary, dividends).

A working pensioner must decide whether to submit an application for basic exemption to:

  • their employer
  • the Social Insurance Board; or
  • their employer and the Social Insurance Board.

If the pensioner has already submitted an application for basic exemption to the Social Insurance Board and wishes that the Social Insurance Board would continue applying the basic exemption to their pension, they don't have to submit a new application.

If the person is using basic exemption only for one pension, their income will be taxed from the first euro.

If the pensioner has currently submitted an application for basic exemption to their employer and wishes that the employer would continue applying the basic exemption, they must contact their employer in order to specify whether submitting a new application is required or not.

If the person is using basic exemption only from their employer, their pension will be taxed from the first euro.

If the pensioner wishes that the basic exemption would be applied both to their pension and income, they must submit an application for a specific amount of basic exemption both to their employer and the Social Insurance Board. When submitting such application, the working pensioner must keep in mind that their monthly tax-free amount cannot exceed the amount established by law (a maximum of 500 euros per month).

NB! Every working pensioner must assure by themselves that their monthly basic exemption would not exceed the given limit. The Social Insurance Board cannot check if the person is using their basic exemption with their employer.

EXAMPLE 1: A pensioner earns a monthly pension in the amount of 300 euros and monthly salary in the amount of 300 euros. The total monthly income of the pensioner is 600 euros; they have the right to use the monthly basic exemption in the amount of 500 euros. The pensioner submits to the Social Insurance Board an application for basic exemption in the amount of 300 euros per month. Therefore they will be receiving their pension in full. To their employer, the pensioner will submit an application for basic exemption in the amount of 200 euros per month. In such way, the pensioner will be able to use the basic exemption they are entitled to in full.

EXAMPLE 2: A person earns a monthly salary of 800 euros, receives a monthly pension of 380 euros and a monthly payment from the second pension pillar in the amount of 50 euros. The person's total monthly income taxable with income tax is 1230 euros (800­+380+50). As the person's total monthly income is higher than 1200 euros they have the right for a basic exemption in the amount of 483 euros per month (500-500/900*(1230 – 1200)).   

A person submits an application for basic exemption to the Social Insurance Board

A person submits an application for basic exemption to their employer

A person submits an application for basic exemption to the Social Insurance Board and their employer

Income will be taxable from the first euro (800x20%=160).

 

A monthly basic exemption in the amount of 483 euros will be applied to the pension. The person will receive the pension in full, in the amount of 380 euros.             As the pension is smaller than the given amount of basic exemption, the amount of basic exemption left unused by the person is 103 euros per month (483-380). The Social Insurance Board will share the leftover amount with the Pension Centre making payments from the second pension pillar.  

The monthly basic exemption left unused will be 53 euros.

The total monthly income of the person is 1070 euros (salary 640, pension 380, payment from the second pension pillar 50)

They have the right to submit an income tax return in order to retrieve the overpaid income tax.

                              

Basic exemption in the amount of 483 euros will be applied to the income as the application for basic exemption has been submitted to the employer ((800-483)x20%=63,4))

As the application for basic exemption has been submitted to the employer, the pension (380x20%=76) and payments from the second pension pillar (50x20%=10) will be taxed with income tax from the first euro.

The person uses the amount of monthly basic exemption they are entitled to.

The person's total monthly income is 1080.6 euros (salary 736.6, pension 304, payment from the second pension pillar 40)

 

Based on the application the person requests that basic exemption in the amount 236 euros per month would be applied to their pension ((380-236)x20%=28.8)

The person requests that basic exemption in the amount 247 euros per month would be applied to their salary (800-247)x20%=110.6). The payment from the second pension pillar will be taxed from the first euro (50x20%=10)                   

The person's total monthly income is 1080.6 euros (salary 689.4, pension 351.2, payment from the second pension pillar 40)

 

A pensioner must keep in mind that if they receive income exceeding 1200 euros from multiple sources (pension, salary or other income), the monthly tax calculation might not give the same results as the annual tax calculation.

EXAMPLE: A person receiving monthly gross earnings in the amount of 1200 euros, therefore having the right to use the maximum amount of monthly basic exemption (500 euros), sells a registered immovable in February, earning 12 000 euros, and receives dividends in June in the amount of 3000 euros. The person's total annual income is 29 400 euros ((1200X12) +12 000+3000). As their employer has withheld income tax throughout the whole year, the person must pay additional income tax on the grounds of the annual income tax return.

 

Application for basic exemption

If you have already submitted an application for basic exemption to the Social Insurance Board you do not have to submit a new application. Your current application for basic exemption will be re-calculated for the right amount. You can check if you have submitted an application to the Social Insurance Board from December 1st on www.eesti.ee.

EXAMPLE 1: A person receiving parental benefit in the amount of 600 years per month has submitted an application for basic exemption from the parental benefit. Currently, a monthly basic exemption in the amount of 180 euros is applied to their parental benefit and the amount of their monthly parental benefit is 516 euros (600-180)x20%). From 01.01.2018, we will be automatically applying basic exemption of 500 euros on the grounds of their application and the amount of parental benefit they will be receiving monthly is 580 euros (600-500)x20%), which is 64 euros more per month in comparison to 2017.  

EXAMPLE 2: A pensioner is receiving a monthly pension in the amount of 600 euros per month; they have submitted an application for basic exemption from the pension. Currently, a monthly basic exemption in the amount of 416 euros is applied to their pension (236 -180)­ and the amount of their monthly pension is 563.2 euros (600-416)x20%). From 01.01.2018, there will be no additional basic exemption for pensions. Therefore we will be automatically applying basic exemption of 500 euros on the grounds of their application. The amount of pension they will be receiving monthly is 580 euros (600-500)x20%), which is 16.8 euros more in comparison to 2017.

EXAMPLE 3: A person is receiving compensation for damages in the amount of 600 euros per month; they have submitted both applications for basic exemption from the compensation for damages. Currently, a monthly basic exemption in the amount of 244 euros (180+64)­ is applied to their compensation for damages and the amount of compensation for damages received by the person is 528.8 euros per month (600-244)x20%). 01.01.2018 there will be no additional basic exemption (64 euros per month) for compensation for damages. Therefore we will be automatically applying basic exemption of 500 euros on the grounds of their application. The amount of compensation for damages they will be receiving monthly is 580 euros (600-500)x20%), which is 51.2 euros more in comparison to 2017. 

An application can be submitted to the Social Insurance Board via the state portal www.eesti.ee, mail (Endla 8, Tallinn, 15092) or e-mail (info@sotsiaalkindlustusamet.ee). You can also bring the application to one of our customer service locations (contact information is available here HERE). An application form is available for downloading HERE but we also accept free-format applications.

In the application you must request the withholder of income tax to 

  • apply basic exemption or
  • not to apply basic exemption or
  • apply basic exemption in the amount of a specific sum, for example 100 euros per month.

If an application is submitted by the 19th date (included) it will be applied from the next month, an application submitted later from the month after next.

If the Social Insurance Board is not applying basic exemption to your payments, your pension or compensation for damages will be taxed with income tax from the first euro similarly to parental benefit.

A pensioner who has not received any income taxable with social tax in 2017 will automatically receive basic exemption calculated by the Social Insurance Board in the extent established by law.  No separate application is required.

If, for some reason, the pensioner does not wish us to apply basic exemption to their pension, they must notify the Social Insurance Board of their wish at the latest by December 20th of current year.

 

What to keep in mind

  • Think through your estimated annual income by the start of 2018. This includes monthly earnings (e.g. salary, pension, rent, etc.) and hopefully other earnings (e.g. earnings from property or security sales, etc.).
  • On the basis of estimated annual income, make a decision on how to use the monthly basic exemption and notify the person to whom you have submitted an application for applying basic exemption.
  • If your income is very erratic and/or unpredictable it is reasonable to not take into account the annual basic exemption at all. If in retrospect you will have the right to receive exemption from income tax based on your annual income, you will be able to retrieve the amount on the grounds of the income tax return of 2019.
  • Keep your e-mail address updated in MTA and eesti.ee so we could notify you of having used up your amount of annual basic exemption in the middle of the year.

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