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 tapered down as annual income rose, disappearing entirely above a threshold. That taper is what produced the tax hump.
How the hump worked
Because the exemption shrank as income grew, each extra euro earned in the taper band did two things at once: it was itself taxed, and it reduced the untaxed portion of everything below it. The result was an effective marginal rate substantially higher than the nominal rate - enough that employees turned down overtime and employers structured bonuses around it.
What applies from 1 January 2026
- Working-age individuals: €700 per month, €8,400 per year.
- People of retirement age: €776 per month, €9,312 per year.
- The amount no longer decreases as income rises.
A person earning €1,500 gross and a person earning €5,000 gross now receive exactly the same exemption. The marginal rate on additional income is the plain 22%.
The written application requirement
This is the part that causes real payroll errors. An employer may only apply the basic exemption to an employee's salary if that employee has submitted a written application asking for it. The application is made to one payer - 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 is not out of pocket permanently - they recover the difference through their annual income tax return - but they will notice the smaller net pay, and they will ask you about it.
What this changes in practice
- Bonus and overtime planning around the taper band is no longer necessary. Pay what the work is worth.
- Net pay calculations for mid-range salaries change from January. Employees will see a difference and it is worth explaining it before they ask.
- Payroll software needs the flat figure. Software still applying a tapered calculation will produce wrong withholding 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 comparison
Take an employee on €2,500 gross per month. Under the flat rule, €700 is exempt and €1,800 of the taxable base is subject to 22% income tax, after deducting the employee's unemployment insurance contribution of 1.6% and funded pension contribution where applicable. Previously, part of that €700 would have been clawed back by the taper, raising the effective rate on the top slice of pay. The arithmetic is now simple enough that employees can check it themselves.
What has not changed
The income tax rate itself is unchanged at 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 declaration is still due by the 10th of the following month.
Frequently asked questions
What is the basic exemption in Estonia in 2026?
€700 per month and €8,400 per year for people of working age, applied as a flat amount that no longer decreases with income. People of retirement age get €776 per month and €9,312 per 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.
General information, not tax advice
This article reflects Estonian law as it stands on the date shown. Rules change and individual circumstances differ - confirm your own position with us before acting.