In 2017, the basic exemption for a natural person is 180 euros per month (2160 euros per year).
Every 1.8 euros exceeding the monthly salary of 1200 euros reduces the basic exemption by 1 euro (formula: 500 – 500 / 900 × (payment – 1200)).
If the monthly salary is 2100 euros, there is no basic exemption.
The basic exemption can be calculated by only one employer on the basis of an employee's application.
What does annual income include?
Annual income includes: wages and other remuneration; service fees paid on the basis of a contract under the law of obligations; business income; gains from transfers of property; rent; licence fees; interest; dividends; pensions, grants, scholarships, awards, benefits or other income; wages and other remuneration and dividends received in a foreign state and not subject to income tax in Estonia; dividends or payments from owners' equity received from an Estonian company and subject to tax at the company level; and amounts subject to taxation under the Simplified Taxation of Business Income Act that have been reduced by the amount social tax in the business income tax.
Annual income does not include tax-exempt benefits, grants and scholarships and tax exemptions (e.g. sales of housing or movables in personal use) that are not declared in the income tax return for a natural person.
Example. An employee whose gross earnings in 2018 are 1000 euros per month has an annual income of 12,000 euros while the basic exemption is 500 euros per month, i.e. 6000 euros per year. At the same time, an employee whose gross earnings are 1000 euros per month and who receives an old-age pension of 425 euros per month has an annual income of 17,100 euros (12,000 + 5100) while the basic exemption is 4500 euros per year.1
There are three ways in which an application for calculating the basic exemption can be submitted
The basic exemption can be applied on the basis of a person's application by only one withholding agent for income tax (e.g. the employer or the Social Insurance Board). It must be specified in the application whether the withholding agent for income tax should:
- calculate the basic exemption;
- not calculate the basic exemption; or
- calculate a specific amount of the basic exemption, e.g. 100 euros per month.
Annual or monthly application for the basic exemption
A withholding agent for income tax can apply the basic exemption on a monthly basis. The amount of the basic exemption is calculated on the basis of the amount of the employee's gross earnings or other remuneration.
An employee who works for more than one employer and/or receives a pension must bear in mind that they have the right to the application of the basic exemption with only one employer or the Social Insurance Board.
People should also take into account that if income from several sources (e.g. wages, pensions or other income) exceeds 1200 euros per month, monthly tax accounting will not have the same result as annualised tax accounting. The actual income tax liability will become clear when submitting the income tax return.
Example. A person whose gross earnings throughout the year are 1200 euros per month and whose basic exemption is 500 euros per month sells a registered immovable in February, earning 12,000 euros, and receives dividends of 3000 euros in June, thus amassing an annual income of 29,400 euros. Since the employer has applied the basic exemption throughout the year, the person has to pay additional income tax on the basis of the income tax return (on 6000 euros, i.e. 1200 euros).2
If the annual income is between 14,400 and 25,200 euros, it is important for the person to take their possible monthly income and expected monthly income into consideration and to submit an application to the employer based thereon asking them to either calculate the basic exemption or not calculate it, or to calculate a specific amount of the basic exemption.
It is recommended to submit one application for the whole year. In the case of changing income, the application may be changed or withdrawn once a month for a smaller amount of the basic exemption to be calculated or for the basic exemption not to be calculated at all.
It is likely that far more people will have to repay income tax to the state following their annual tax returns, the maximum additional amount due being 1200 euros.
Example. An employee's monthly salary is 1200 euros. The employer applies 500 euros of the basic exemption per month. In December, the employee receives a Christmas bonus in an amount equivalent to the monthly salary, therefore 2400 euros is paid in December. The basic exemption cannot be applied in December and the entire amount of 2400 euros is subject to income tax, starting from the first euro. Considering the year as a whole, the employee's average monthly income is 1300 euros and they have to repay 33 euros to the state.3
Example. An employee's monthly salary is 1200 euros. The employer applies 500 euros of the basic exemption per month. Unexpectedly, the employee inherits a house on the other side of Estonia, and immediately sells it. Sales income is 20,000 euros. Since it is not the employee's permanent residence and the inherited property had no acquisition cost for its recipient, the entire amount of 20,000 euros received is considered to be taxable income. The average monthly income over the course of the year is (12 × 1200) + 20,000 / 12 = 2867 euros, therefore more than 2100 euros. The amount repaid to the state is 1200 euros + 4000 euros in income tax paid on the gains derived from the transfer of property (5200 euros in total).4
How to avoid having to repay income tax
Everyone should be able to calculate their income for the following period; based on the result, there are three options:
the basic exemption applied by the employer (if remuneration with
one payer is less than 2100 euros) and paying additional income tax
with the following year's income tax return, if needed;
calculating the approximate tax-exempt amount for the year and submitting an application to the employer to apply the tax exemption based thereon. In such a case, recalculation with the tax return for the year is minimal or non-existent; or
not applying the basic exemption on a continuous basis and still getting a refund of income tax with the tax return for the year.
Tax and Customs Board
2 Tax and Customs Board
Kindsigo Konsultatsioonid OÜ,
Kindsigo Konsultatsioonid OÜ,