Crash course: how to deduct taxes from the salary in Estonia

The salary and also the income from the employment are charges paid for the provided service on the basis of the employment contact or the contract under the law of obligations (contract for services, authorisation contract). The income from employment is declared (in form TSD) and all taxes of the workforce shall be paid by the employer. Taxes are paid from gross salary including the VAT, the social tax, and if necessary also the contribution to the mandatory funded pension and the unemployment insurance, after which the net sum is paid to the employee.

The social tax enables to fund the pension insurance and the compulsory health insurance. The rate of the social tax is 33% and the employer is obliged to pay the minimal social tax in the sum of 192,72 EUR per month per every employee working full-time. People working subject to the contract under the law of obligations have to work to receive health insurance in the amount, of which the corresponding limit of the social tax rate is declared.

The natural person is subject to the income tax, which is deducted within 20%. The income tax is not paid from the entire gross salary. Namely, in Estonia the basic exemption is established, which is a part of salary from which no income tax is paid. The basic exemption may depend on the annual income: in case the annual income is up to 14 400 EUR, the basic exemption is 6000 EUR or 500 EUR per month. In case the annual income increases from 14 400 EUR to 25 200 EUR, the basic exemption is decreased according to the formula as follows: 6000 – 6000 ÷ 10 800 × (income from the sum – 14 400). If a person gets income over 25 200 EUR, the income tax has to be paid from the entire income. It is important to point out that in order to use the basic exemption, the recipient of the payment must submit a corresponding application to the person making the payment.

The contribution in the unemployment insurance is used for funding unemployment insurance: 

if a person is made redundant, the unemployment insurance benefit is paid from the corresponding fund. The corresponding payment is divided between the employee and the employer: 1.6% of unemployment insurance tax is deducted from the gross salary and in addition, the employer pays 0.8% of the unemployment insurance tax. The present rates is valid until 2025. It is important to keep in mind that the obligation to deduct unemployment tax (1.6%) ends when the employee reaches the retirement age or the retirement pension is appointed.

The mandatory funded pension is a compensation, which is paid to a retired person to ensure 

him /her monthly income. The payment rate of the mandatory pension fund or column II is 2%. 

The reform of the mandatory funded pension took effect on November 6th 2020 or in other words –now people can waive the right to have column II. It is worth to know that if a person wants to withdraw from the funded pension before reaching the retirement age, the payment is subject to the income tax.

The social tax and the employer’s unemployment insurance tax is paid from the gross salary and constitute additional expenses for the employer. The physical person’s income tax, the employee’s unemployment insurance tax and the compulsory funded pension is deducted from the 

employee’s gross salary and the employee’s salary decreases by the corresponding taxes and the employee receives the net sum.

Information about different taxes and tax rates is available on the homepage of the Tax and Customs Board www.emta.ee. It is possible to observe the distribution of taxes deducted by using the salary calculator in Arveteenus.ee. Depending on the fact whether the employee belongs to the mandatory funded pension system and has the intention (or non-intention) to use the basic exemption, Arveteenus.ee calculates, declares and pays all deducted taxes and pays the net sum to the employee.

Photo: Karolina Grabowska