If you followed Estonian tax news through 2024 and 2025 you were told to expect a 24% income tax rate, a new 2% tax on corporate profits and a security tax on top. Most of that was repealed before it took effect. What remains is a shorter list, but it includes one genuinely significant change for every employee in the country.
Income tax stays at 22%
The withholding rate on salaries and the rate on distributed corporate profit both remain at 22% in 2026. The planned rise to 24% was part of the Defence Tax Act, and that Act was repealed on 18 July 2025 before the increase took effect. The 2% corporate profit tax that would have applied from 2026 was repealed with it.
For a company, this means distributed profit is still taxed at 22/78 of the net dividend - an effective 22% of the gross distribution. Retained profit remains untaxed.
The tax hump is gone
This is the change that matters most in day-to-day payroll. Until the end of 2025, the basic exemption tapered away as income rose, producing the notorious "tax hump" where an extra euro of gross salary could be taxed at an effective rate well above the headline rate.
From 1 January 2026 the basic exemption is a flat amount for everyone of working age: €700 per month, €8,400 per year, regardless of how much you earn. People of retirement age have a higher exemption of €776 per month and €9,312 per year.
One catch that trips up employers: the exemption can only be applied to a salary if the employee has submitted a written application to that employer. No application, no exemption - and the employee has to reclaim it through their annual return.
VAT remains at 24%
The standard VAT rate rose from 22% to 24% on 1 July 2025 and stays there in 2026. There is no further increase scheduled. The reduced rates are unchanged: 13% for accommodation and 9% for books, periodicals and medicines. The registration threshold remains €40,000 of taxable turnover in a calendar year.
Social tax and payroll contributions
The social tax rate stays at 33%. The monthly base for the employer's minimum social tax obligation is €886, producing a minimum monthly payment of €292.38 per employee even where actual pay is lower. Unemployment insurance is withheld from the employee at 1.6% and paid by the employer at 0.8%. Funded pension contributions remain at 2%, 4% or 6% depending on the individual's own election.
Minimum wage rises to €946
Employers and unions agreed a national minimum wage of €946 per month, up from €886, taking effect from 1 April 2026 rather than 1 January. That April start date is unusual and worth noting in payroll planning - the first three months of 2026 run on the old figure.
Sickness benefit cap
From 1 January 2026 there is a daily cap of €126.87 on temporary incapacity for work benefit paid from the ninth day of illness.
Excise duties
Tobacco and alcohol excise rose by 10% on 1 January 2026. Fuel excise increases from 1 May 2026, with petrol going to €621 per 1,000 litres and diesel to €459 per 1,000 litres. Electricity excise also rises from the same date. These feed through to input costs for transport-heavy and hospitality businesses.
Land tax and motor vehicle tax
From 2026 local governments set their own upper limits for land tax increases, within a range, and home-owner relief becomes a fixed amount of up to €1,000 determined locally rather than an area-based calculation. For motor vehicle tax, M1 vehicles with seven or more seats are now taxed at the lower N1 rates, and a €100 per child allowance can be deducted.
What did not change
The entrepreneurship account rate stays at 20%; the planned increase to 22% was cancelled. Corporate taxation continues to work the same way it always has - nothing on retained profit, tax on distribution.
What you should actually do
- Check that every employee has a current written application for the basic exemption on file, because the flat €700 only applies if they have.
- Update payroll software for the new flat exemption before the January run, not after.
- Diarise the €946 minimum wage for 1 April rather than 1 January.
- If you were budgeting for a 24% income tax rate or a 2% corporate profit tax, rebuild those forecasts - those taxes do not exist.
Frequently asked questions
Is Estonian income tax 22% or 24% in 2026?
22%. The increase to 24% was repealed together with the Defence Tax Act on 18 July 2025 and never took effect.
What is the basic exemption in 2026?
€700 per month and €8,400 per year for people of working age, applied as a flat amount regardless of income level. For people of retirement age it is €776 per month and €9,312 per year.
Did the security tax happen?
No. The Defence Tax Act was repealed before the 2% corporate profit tax and the income tax increase came into force.
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.