Taxing Wages 2024

Estonia

Abstract

This chapter includes data on the income taxes paid by workers, their social security contributions, the family benefits they receive in the form of cash transfers as well as the social security contributions and payroll taxes paid by their employers. Results reported include the marginal and average tax burden for eight different family types.

Methodological information is available for personal income tax systems, compulsory social security contributions to schemes operated within the government sector, universal cash transfers as well as recent changes in the tax/benefit system. The methodology also includes the parameter values and tax equations underlying the data.

 

 

The Estonian currency is the Euro (EUR). In 2023, EUR 0.96 was equal to USD 1. In 2023, the average worker in Estonia earned EUR 21 595 (Secretariat estimate).

1. Personal income tax system

1.1. Central government income tax

1.1.1. Tax unit

The tax unit is the individual since January 1^st, 2017.

1.1.2. Tax allowances

1.1.2.1. Standard tax reliefs

• A general (basic) allowance of EUR 7 848 is deductible from individual income in 2023. It starts declining from income of 14 400 and reaches EUR 0 at EUR 25 200. From 1 January 2017, the supplementary basic allowance for the spouse came into force. The spouse’s yearly income must be below EUR 2 160 and the family`s total yearly income must be below EUR 50 400.

• In 2023 a basic allowance at pensionable age was introduced, EUR 8448 per year. It applies to people who have reached or will reach pensionable age during the calendar year, regardless of the amount of the person`s income.

• A child allowance of EUR 1 848 is also deductible from income for each of the second and EUR 3 048 for third any subsequent children up to and including the age of 16.

• Relief for social security contributions: Employee’s compulsory contributions for unemployment insurance are deductible for income tax purposes.

• Tax credits: was abolished from 2017.

1.1.2.2. Non – standard tax reliefs applicable to income from employment

• II pillar pension contributions: In 2021, these represent compulsory payments to private funds for employees born in 1983 or after and are paid at a rate of 2% of earnings. In December 2020, these payments became wholly voluntary and will remain so until August 31, 2021. Only about 10 thousand employees stopped their payments. In 2021, different opt-out options were introduced, making the II pillar, in effect, voluntary. People have four basic options: 1. Continue as is; 2. The accumulated pension assets will be transferred to a special private investment account, the 2% and 4% payments will continue to that account, people will basically become their own second pillar pension fund investment manager; 3. Stop the payments into the pillar, existing assets remain invested in the fund, the person can opt in with their payments again after 10 years; 4. Stop the payments and take out assets (pay income tax), the person can opt in again after 10 years. New entrants to the labour market are automatically added to the second pillar but have the same opt-out options. About 149 000 persons younger than pension age chose to leave the scheme in 2021 and about 52 000 in 2022. Also pension age people, are leaving the scheme. In the beginning of 2022 about 53% of resident employees made II pillar payments compared to 77% in 2021.

• Housing loan interest, educational costs, gifts and donations are deductible from taxable income within upper limits of EUR 1 200 and 50% of taxable income per year. Housing loan interest deductions upper limit is EUR 300 within that EUR 1 200 from 2017.

• Voluntary pension contributions (III pillar): Contributions paid by a resident to the provider of a pension plan based in Estonia or in another EU Member State according to a pension plan that is approved and entered into a special register in accordance with the pension legislation are deductible from taxable income. In 2023 such deductions are subject to an annual limit of a sum equal to 15% and maximum of EUR 6 000 of the employee’s, public servant`s or members of legal person management or control body income in a calendar year.

1.1.3. Tax schedule

The rate of 20% applies for all levels of taxable income.

1.2. Regional and local income tax

There are no regional or local income taxes.

2. Compulsory social security insurance system

The compulsory social security insurance system consists of three schemes as follows:

• pension insurance;

• health insurance;

• unemployment insurance.

2.1. Employees’ contributions

Employees pay 1.6% of their earnings in contributions for unemployment insurance. The taxable base is the total amount of the gross wage or salary including vacation payments, fringe benefits and remuneration of expenses related to work above a certain threshold. The assessment period is the calendar month.

2.2. Employers’ contributions

Social security insurance contributions are also paid by employers on behalf of their employees. The taxable base and the assessment period are the same as for employees’ contributions. The employers’ contribution rates are applied in two parts:

• Unemployment insurance – 0.8% of employee earnings.

• Pension and health insurance – as follows for monthly earnings above EUR 654.

 

Scheme name	Rate of contribution (%)
Pension insurance	20.00
Health insurance	13.00
Total	33.00

In addition there is a lump sum payment for each employee of EUR 215,82 per month (split between pensions and health insurance on a 20:13 basis).

3. Payroll tax

None.

4. Universal cash transfers

4.1. Transfers related to marital status

None.

4.2. Transfers for dependent children

Estonia’s family benefits are designed to provide partial coverage of the costs families incur in caring for, raising and educating their children.

The state pays family benefits to all children until they reach the age of 16. Children enrolled in basic or secondary schools or vocational education institutions operating on the basis of basic education have the right to receive family benefits until the age of 19. Applications for the allowance are made on an annual basis and the payments are not taxable. The values of these benefits in 2023 are shown in the table below. The single parent child allowance is paid for each child. From 1^st of July 2017 the parents allowance for families with three to six children was introduced, EUR 300 per month, in 2023 it was increased to EUR 650 per month. Parents allowance for families with seven or more children was increased from EUR 168.74 per month to EUR 400 per month from 1^st of July 2017, in 2023 it was increased to EUR 850 per month.

In addition, there are nine other types of family benefits for which payment depends on either the age of the child(ren) and/ or the status of the person(s) looking of them: parental benefit; additional parental benefit for fathers and 30 days of paternity leave, childbirth allowance and allowance for multiple birth of three or more children; maintenance allowance, conscript’s child allowance; adoption allowance (single payment), guardianship allowance, child care allowance. These are not included in the modelling.

 

Type of benefit	Annual amount of benefit (in EUR)
Child allowance (paid until children turn 16 or until the end of the academic year in which they turn 19 if they continue studying).
- For the first and second child	960.00
- For the third and any subsequent children	1 200.00
- Single parent’s child allowance	960
- Parents allowance for families with three to six children	7 800.00
- Parents allowance for families with seven or more children	12 200.00

In addition to existing benefits, from 1^st of July, 2013 the need-based child benefits were introduced. Need-based family benefit income threshold was based on Statistical Office relative poverty threshold published by the 1^st of March in a year before current budget year. In 2017 the need based threshold was EUR 394 in a month for the first household member. For every other at least 14-years old member the threshold was EUR 197 and for the younger members EUR 118.2 in a month. Need-based family benefit was in 2017 EUR 45 in a month for single child family and EUR 90 for families with two or more children. These need-based benefits were abolished from 2018.

5. Main changes in tax/benefit system since 2005

• The personal income tax rate was steadily reduced from 24% in 2005 to 21% in 2008. In 2015 it was reduced to 20%.

• The child tax allowance applied for the third and subsequent children for 2005 and the second and subsequent children in 2006 and 2007. It applied to all children in 2008 and then returned to the 2007 position in 2009.

• The employee unemployment contribution rate was reduced from 1% to 0.6% in 2006 and then raised in 2 stages to 2.8% at the end of 2009. The corresponding rates for employers were a reduction from 0.5 % to 0.3% in 2006 increasing to 1.4%. In 2013 the employee unemployment contribution rate was reduced from 2.8% to 2.0% and the corresponding rate for employers from 1.4% to 1.0%. In 2015 the employee unemployment contribution rate was reduced from 2.0% to 1.6% and the corresponding rate for employers from 1.0% to 0.8%.

• In addition to existing benefits, from 1^st of July 2013, the need-based child benefits were introduced. Further details in section 4.2 on cash transfers. These were abolished from 2018.

• From 2016, a non-payable tax credit for low-income earners (“madalapalgaliste tagasimakse”) was introduced. Further details in section 1.1.2. on tax allowances. It was abolished from 2017.

• From 2017 the possibility to use spouse`s basic tax-free allowance was reformed. From 1<sup>st</sup> of January 2017, the supplementary basic allowance for the spouse came into force. The spouse’s yearly income must be below EUR 2 160 and the family`s total yearly income must be below EUR 50 400.

• From 2020 the additional child allowance for third any subsequent children up to and including the age of 16 was increased to EUR 3 048 per year.

• From 2023 the single parent`s child allowance and child allowance for the first and second child was increased to EUR 960 per year, parents allowance for families with three to six children to EUR 7 800 and parents allowance for families with seven or more children to EUR 12 200 per year.

5.1. Changes to labour taxation due to the COVID pandemic in 2020 and 2021

Labour taxation did not change but there were some measures supporting self-employed, employees and employers:

• The state pays the advance payment of social tax for self-employed persons for the first quarter of 2020.

• Temporary cancellation of social tax minimum for employers for three months. Here social tax minimum is the lump sum payment for each employee of EUR 178.20 per month mentioned above. The employer was released of this obligation for three months (March, April and May 2020) and social tax had to be paid from actual payment to employee. It included the unpaid vacation and part-time work.

• Temporary suspension of contributions to the second pillar pension funds. The state suspended pension payments to the second pillar that are made at the expense of social tax from 1^st of July 2020 until 31^th of August 2021. In October 2020, everyone who had joined the mandatory funded pension, was able to decide whether to waive their contribution as well. To do this, an application had to be submitted in October and payments will be stopped from December. There is a compensation mechanism for people who decide to continue their contributions. Only about 10 thousand employees stopped their payments.

• Unemployment Insurance Fund measure for labour market support within 4 months (wage support measure). Wage support measure will help to maintain the income of employees during the emergency situation. It was continued in 2021 for 3 months (from March to May).

• State reimbursement of sick days for workers from the first to the third day of sickness insurance (currently without pay) from March to May 2020. In 2021 state reimburses 6^th+ sick day (normally from 9^th day).

6. Memorandum items

6.1. Average gross annual wage earnings calculation

In Estonia the gross earnings figures cover wages and salaries paid to individuals in formal employment including payment for overtime. They also include bonus payments and other payments such as pay for annual leave, paid leave up to seven days, public holidays, absences due to sickness for up to 30 days, job training, and slowdown through no fault of the person in formal employment.

The average gross wage earnings figures of all adult workers covering industry sectors B–N by NACE Rev.2 are estimated with average wage growth rate forecast of Estonian Ministry of Finance.

6.2. Employer contributions to private pension and health schemes

Some employer contributions are made to private health and pension schemes but there is no relevant information available on the amounts that are paid.

2023 Parameter values

 

Average earnings/yr	Ave_earn	21 595	Secretary estimate
Allowances	Basic_al	7 848
	Basic_al_thrs_1	14400
	Basic_al_thrs_2	25200
	Suppl_al	2160
	Incoome_lim	50 400
	Child_al	1 848
Income tax	Tax_rate	0.20
Employers SSC	SSC_rate1	0.33
	Threshold	7 848
	lump_sum	2 589.8
	SSC_rate2	0.008
Employees SSC	SSC_rate3	0.016
Child allowances
First & second child	CA_first&second	960
Other children	CA_others	1 200
Additional for children of lone parents	CA_onepar	960
Days in tax year	numdays	365

2023 Tax equations

The equations for the Estonian system are mostly on an individual basis.

The functions which are used in the equations (Taper, MIN, Tax etc) are described in the technical note about tax equations. Variable names are defined in the table of parameters above, within the equations table, or are the standard variables “married” and “children”. A reference to a variable with the affix “_total” indicates the sum of the relevant variable values for the principal and spouse. And the affixes “_princ” and “_spouse” indicate the value for the principal and spouse, respectively. Equations for a single person are as shown for the principal, with “_spouse” values taken as 0.

 

	Line in country table and intermediate steps	Variable name	Range	Equation
1.	Earnings	earn
2.	Allowances:	tax_al	P	MINA(Positive(Basic_al-(Positive(earn-Basic_al_thrs_1)*(Basic_al/(Basic_al_thrs_2-Basic_al_thrs_1))))+IF(spouse_earn<Suppl_al,IF(AND(household_earn<income_lim,Married>0),Positive(Suppl_al-spouse_earn),0),0)+SSC_empee+(Children>1)*(Child_al*(Children-1)),earn)
			S	MINA(IF(earn>0,Positive(Basic_al-(Positive(earn-Basic_al_thrs_1)*(Basic_al/(Basic_al_thrs_2-Basic_al_thrs_1)))),0)+SSC_empee,earn)
3.	Credits in taxable income	taxbl_cr	B	0
4.	CG taxable income	tax_inc	B	Positive(earn-tax_al)
5.	CG tax before credits	CG_tax_excl	B	Tax_inc*tax_rate
6.	Tax credits :	tax_cr	B	0
7.	CG tax	CG_tax	B	CG_tax_excl
8;	State and local taxes	local_tax	B	0
9.	Employees' soc security	SSC_empee	B	earn*SSC_rate3
11.	Cash transfers	cash_trans	J	IF(Children<3,CA_firstsecond*Children,(2*CA_firstsecond)+(CA_other*(Children-2)))+(Married='0)*Children*CA_onepar
13.	Employer's soc security	SSC_empr	B	IF(earn>0,IF(earn>threshold,earn*SSC_rate1,lump_sum),0)+earn*SSC_rate2

Key to range of equation B calculated separately for both principal earner and spouse P calculated for principal only (value taken as 0 for spouse calculation) J calculated once only on a joint basis.