If you followed Estonian tax news in 2024 and 2025, you were told to expect a 24% income tax rate. There was also talk of a new 2% tax on corporate profits and a security tax on top. Most of that was repealed before it took effect. The list of real changes is shorter, but one of them matters for every employee in the country.
Income tax stays at 22%
Income tax stays at 22% in 2026, both on salaries and on distributed company profit. A rise to 24% was planned, but the government dropped it in the 2026 budget approved on 24 September 2025. The Riigikogu (the Estonian parliament) passed the change on 3 December 2025.
Separately, the Defence Tax Act was repealed on 19 June 2025, before it took effect. That act included a 2% tax on corporate profits from 2026.
For a company, distributed profit is still taxed at 22/78 of the net dividend. That works out to 22% of the gross distribution. Retained profit, meaning profit you keep in the company, remains untaxed.
The tax hump is gone
From 2026 the tax hump is gone, and this is the change that matters most for day-to-day payroll. Until the end of 2025, the basic exemption (the part of your income that is not taxed) shrank as income rose. This created the well-known "tax hump". In that income band, 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 a month, or €8,400 a year, whatever you earn. People of retirement age have a higher exemption of €776 a month and €9,312 a year.
One catch often trips up employers. The exemption can only be applied to a salary if the employee has given that employer a written application. Without the application there is no exemption, and the employee has to reclaim it through their annual tax return.
VAT remains at 24%
The standard VAT rate rose from 22% to 24% on 1 July 2025 and stays there in 2026. No further increase is 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. In plain terms, you only have to register for VAT once your taxable sales pass that amount in a year.
Social tax and payroll contributions
The social tax rate stays at 33%, paid by the employer on top of the salary. There is also a minimum. Social tax is calculated on at least €886 a month, so the minimum payment is €292.38 per employee, even where actual pay is lower. Unemployment insurance is 1.6%, withheld from the employee, plus 0.8% paid by the employer. Funded pension contributions remain at 2%, 4% or 6%, depending on what the employee has chosen.
Minimum wage rises to €946
The national minimum wage rises to €946 a month, up from €886, as agreed by employers and unions. It takes effect from 1 April 2026 rather than 1 January. That April start is unusual, so plan for it in payroll: 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 sickness benefit (the 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 goes up from 1 May 2026: petrol to €621 per 1,000 litres and diesel to €459 per 1,000 litres. Electricity excise also rises from the same date. If you run a transport or hospitality business, expect these to show up in your costs.
Land tax and motor vehicle tax
From 2026 local governments set their own upper limits for land tax increases, within a range. Home-owner relief becomes a fixed amount of up to €1,000, set locally, instead of a calculation based on land area. For motor vehicle tax, passenger cars (category M1) with seven or more seats are now taxed at the lower rates for light goods vehicles (category N1). A €100 per child allowance can also be deducted.
What did not change
The entrepreneurship account rate stays at 20%; the planned increase to 22% was cancelled. Company taxation also works the same way as before: nothing on retained profit, and tax when profit is distributed.
What should you do now?
- Check that every employee has a current written application for the basic exemption on file. The flat €700 only applies if they do.
- Update your payroll software for the new flat exemption before the January run, not after.
- Put the €946 minimum wage in your calendar for 1 April, not 1 January.
- If you budgeted for a 24% income tax rate or a 2% corporate profit tax, update those forecasts. Neither tax exists.
Frequently asked questions
Is Estonian income tax 22% or 24% in 2026?
22%. The planned rise to 24% was dropped in the 2026 budget in September 2025 and never took effect. The Riigikogu, the Estonian parliament, passed the change on 3 December 2025.
What is the basic exemption in 2026?
€700 a month and €8,400 a year for people of working age, as a flat amount whatever your income. For people of retirement age it is €776 a month and €9,312 a 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.
TagsEstonia tax changes 2026Estonian income tax 2026Estonia VAT 24 percentEstonian tax rates 2026
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