Starting 1 January 2026, significant amendments to the calculation and application of the tax-free minimum for natural persons will take effect under the Estonian Income Tax Act.
Key Changes:
- The general tax-free income is fixed at €700 per month (up to €8,400 per year) for all residents, regardless of total annual income.
- The previous system, where the tax-free amount decreased as income increased, has been abolished.
- This uniform exemption applies to payments made on or after 1 January 2026, irrespective of when the income was earned. For example, salary earned in December but paid in January will be subject to the new rules.
Employer and Employee Responsibilities
- Application Requirement
- Tax-free income can only be applied by an employer upon receiving a written application from the employee.
- If the employee has multiple employers, the application may be submitted to only one employer.
- Employee’s Responsibility
- The employee is solely responsible for monitoring their total annual income to ensure the €8,400 limit is not exceeded. Employers are not obliged to advise or verify this.
- Choice of Amount
- Employees may request the full €700 per month, a smaller amount, or opt out entirely.
- If no application is submitted, income tax must be withheld from the first euro.
- Employees who previously applied for a lower amount must submit a new application to increase it.
- Timing of Application
- The exemption applies based on the payment date, not the earning period.
Recommendations for Employers
To ensure a smooth transition to the new rules, employers should:
- Inform employees about the updated regulations and internal procedures for handling applications.
- Prepare a standardized application form to ensure compliance and accuracy.
- Set clear submission deadlines, ideally before the first payroll in January 2026.
Questions? We’re Here to Help
If you have any questions or need assistance with implementing these changes, please contact Leinonen Tax and Legal team. We are here to help you ensure compliance and make the transition as smooth as possible.
