Income tax exemption in 2026: how it works in Estonia

From 1 January 2026, the rules in Estonia changed that many Russian speakers call “income tax exemption”. It’s important to understand: in most cases, this is not a full exemption, but a tax-free allowance (maksuvaba tulu) — the part of income from which income tax is not withheld.

The main change in 2026: the “tax hump” was abolished (maksuküür), and it was replaced with a single tax-free allowance of €700 per month (€8,400 per year) for everyone — regardless of income level.

What exactly counts as an “exemption”?

In practical terms, “income tax exemption” = applying the tax-free allowance when calculating salary and other payments from which income tax is withheld.

Key figures for 2026:

• Income tax rate (tulumaks): 22%

• Tax-free allowance: €700 per month / €8,400 per year (for a resident, if the allowance is applied)

• For a person of retirement age: €776 per month / €9,312 per year

Which payments does this apply to?

For accounting purposes, it’s important to note that “employment income” (palgatulu) usually includes:

• payment under an employment contract and for work in public service;

• payments under civil-law contracts for services provided (for example, a contract for work/services or a mandate agreement, etc.);

• remuneration for a member of the management board and/or management and supervisory bodies.

For these types of payments, the usual rule is: the payer withholds the tax and reports everything in the TSD.

2025 vs 2026: what changed

How to apply the tax-free allowance: a request to your employer

1) A written request is required

For an employer to apply the €700 per month allowance, an employee usually submits a written request (either in free form or using the company’s template).

Example of a short wording:

Please apply the tax-free allowance (maksuvaba tulu) of €700 per month starting from 1 January 2026.

2) The request — to only one employer

If a person has multiple jobs, the tax-free allowance can be applied by only one employer. Otherwise, an additional tax payment is almost guaranteed at year-end.

3) If there’s no request

Then the employer withholds income tax from the full taxable base. As a rule, this results in an overpayment during the year and a refund after filing the annual tax return (if you’re entitled to the allowance for the year).

Important for the 2025 → 2026 transition: the cash-basis principle

Salary taxation in Estonia is on a cash basis: it’s calculated based on the payment date, not the month the salary was earned for.

If the salary for December 2025 is paid in January 2026, then the 2026 rules and rates apply, and it is reported in the January TSD.

Examples (2026): how much you’ll receive “net”

Below are simple examples. For clarity, we’ll use the common employee deductions:

• employee unemployment insurance: 1,6%

• funded pension (pillar II): 2% (if the person participates)

Note: if your pillar II rate is 4% or 6% (or you don’t participate), the final amounts will be slightly different.

Example 1. Gross salary €1,500, the €700 allowance is applied

1. unemployment insurance 1.6%: 1500 × 0.016 = 24,00 €

2. pillar II 2%: 1500 × 0.02 = 30,00 €

3. income tax base before the allowance: 1500 − 24 − 30 = 1446,00 €

4. apply the €700 allowance → taxable base: 1446 − 700 = 746,00 €

5. income tax 22%: 746 × 0.22 = 164,12 €

Net: 1500 − 24 − 30 − 164,12 = 1281,88 €

Example 2. Gross salary €3,000, the allowance is not applied (no request submitted)

1. unemployment insurance 1.6%: 3000 × 0.016 = 48,00 €

2. pillar II 2%: 3000 × 0.02 = 60,00 €

3. base: 3000 − 48 − 60 = 2892,00 €

4. income tax 22%: 2892 × 0.22 = 636,24 €

Net: 3000 − 48 − 60 − 636,24 = 2255,76 €

If the €700 allowance were applied, income tax would be lower by about €154 per month (700 × 22%), provided the allowance is used in full.

Example 3. Pension €1,000 (retirement age), allowance €776

1. taxable base: 1000 − 776 = 224,00 €

2. income tax 22%: 224 × 0.22 = 49,28 €

Net: 1000 − 49,28 = 950,72 €

Example 4. A €2,000 payment under a services/work contract (treated as “similar to salary”)

If the payment is taxed as palgatulu and the usual employee deductions apply (as in the examples above):

1. unemployment insurance 1.6%: 2000 × 0.016 = 32,00 €

2. pillar II 2%: 2000 × 0.02 = 40,00 €

3. base before the allowance: 2000 − 32 − 40 = 1928,00 €

4. €700 allowance → base: 1928 − 700 = 1228,00 €

5. income tax 22%: 1228 × 0.22 = 270,16 €

Net: 2000 − 32 − 40 − 270,16 = 1657,84 €

Important: for contract-based payments, a lot depends on the recipient’s status (FIE, ettevõtluskonto, non-resident, etc.) and which contributions apply in the specific case.

Checklist for the accountant and employer

1. Update payroll calculations: apply the €700 allowance and remove the “tax hump” logic.

2. Сollect/update requests to apply the allowance.

3. Check employees with multiple employers (the allowance can be applied by only one).

4. Factor in the cash-basis rule at year-end (payment in January → 2026 rules).

5. Briefly explain to employees: without a request, tax is withheld from the full base.

FAQ

Is this really an “income tax exemption”?
No — it’s a partial exemption: the allowance amount is not subject to income tax.

Do you need to submit a request every year?
It depends on the company’s policy and whether a request was submitted earlier. In practice, many employers accept it once, but when rules or amounts change, they often ask for an updated request.

Can you apply the allowance with two employers as €350 each?
No. During the month, the allowance can be applied by only one employer.

If you don’t submit a request, do you “lose” the allowance?
Usually not: the allowance is taken into account in the annual tax return, and any overpayment is refunded. But it’s better to apply it right away so you receive more net pay each month.