The Estonian basic exemption (maksuvaba tulu) is the amount of annual income taxed at 0%. Until 2025 it was not a fixed amount. It started at a maximum and got smaller as annual income rose, disappearing entirely above a threshold. That shrinking is what produced the tax hump.
How did the tax hump work?
The exemption shrank as income grew, so each extra euro earned in the taper band did two things at once. It was taxed itself, and it also reduced the untaxed part of the income below it. The result was an effective marginal rate well above the nominal rate. It was high enough that employees turned down overtime and employers planned bonuses around it.
What applies from 1 January 2026
- Working-age individuals: €700 a month, €8,400 a year.
- People of retirement age: €776 a month, €9,312 a year.
- The amount no longer decreases as income rises.
A person earning €1,500 gross and a person earning €5,000 gross now get exactly the same exemption. Every extra euro of income is taxed at the plain 22%.
The written application requirement
An employer may only apply the basic exemption to a salary if the employee has asked for it in a written application. This part often causes payroll errors. The application goes to one payer only, so if someone has two jobs, only one employer may apply the exemption.
If an employee has not applied, you withhold income tax on the full gross amount. The employee does not lose the money for good, because they get the difference back through their annual income tax return. They will still notice the smaller net pay, and they will ask you about it.
What this changes in practice
- You no longer need to plan bonuses and overtime around the taper band. Pay what the work is worth.
- Net pay for mid-range salaries changes from January. Employees will see a difference, so it helps to explain it before they ask.
- Payroll software needs the flat figure. Software that still uses the old tapered calculation will withhold the wrong amount all year.
- Employees with two employers should check that only one is applying the exemption. Otherwise they will owe tax at year end.
A worked example
Take an employee on €2,500 gross a month. Under the flat rule, €700 is exempt. The remaining €1,800 is taxed at 22%, after first deducting the employee's unemployment insurance contribution of 1.6% and any funded pension contribution. Before 2026, the taper would have clawed back part of that €700, which raised the tax on the top slice of pay. The sums are now simple enough for employees to check themselves.
What has not changed
The income tax rate itself is still 22%. Social tax remains 33% on the employer side, with a minimum monthly base of €886. Unemployment insurance stays at 1.6% for the employee and 0.8% for the employer. The TSD, the monthly payroll tax return, is still due by the 10th of the following month.
Frequently asked questions
What is the basic exemption in Estonia in 2026?
€700 a month and €8,400 a year for people of working age, as a flat amount that no longer decreases with income. People of retirement age get €776 a month and €9,312 a year.
Does the employer apply it automatically?
No. The employee must submit a written application to that specific employer. Without it, income tax is withheld on the full amount.
Can two employers both apply the exemption?
No. Only one payer may apply it. If two do, the employee will have underpaid tax and will owe the difference on their annual return.
TagsEstonia basic exemption 2026Estonian tax hump abolished700 euro exemption EstoniaEstonian income tax relief
This page is for general information. For a better answer, get in touch and receive a personal recommendation.