The Estonian tax system has been in constant change in recent years, but the 2026 income tax reform is one of the most important. The previous complex system of calculating tax-free income, where the benefit depended on the amount of income and created a so-called tax hump, will disappear. Instead, a uniform and simple tax-free income will be established for all people of working age. The change will affect both employees and employers: for employees, it means more money and predictability, and for employers, clear rules regarding declarations and tax calculations. Let's take a closer look at what this reform brings and how to adapt to it.
What will change?
From January 1, 2026, the tax-free income for all working-age people will be 700 euros per month, or 8,400 euros per year.
For those of retirement age, it is even higher – 776 euros per month (9,312 euros per year).
And most importantly: tax-free income no longer depends on income. The complicated so-called tax hump, which until now reduced the benefit even for the average salary, will disappear.
The income tax rate will remain at 22%, so the increase to 24% will not occur. Tax calculations will become clear and predictable.
Practical example
Let's say you earn 1,500 euros per month.
Previously, tax-free income would have decreased and calculations would have proved difficult.
Now the tax-free income is 700 euros, the taxable portion is 800 euros.
The result: more money in your bank account and less headache from calculations.
The average wage earner will gain over 1,800 euros per year compared to the previous system. This is not just a number – it is a vacation, a home renovation, or an investment in the future.
Employer obligations 2026
The tax-free income reform does not only affect employees - employers must also follow certain rules.
Application of tax-exempt income based on the application
- Tax-free income is calculated only based on the employee's written application.
- The employee can choose which employer the tax-free income will be applied to (if there are multiple jobs).
- The employee may indicate in the application:
- fully tax-free income (€700 per month);
- a lower amount than desired.
- If the application contains the wording "according to the statutory rate", the employer may apply the current amount without requesting a new application.
Calculation based on the payment month and declarations
- Tax-free income is applied on a cash basis – according to the date of payment.
- Example: December salary is paid in January → 2026 rates apply.
- The employer must correctly submit TSD declarations.
- If there is no declaration, income tax must be withheld from the first euro.
Informing and documenting employees
- It is necessary to inform employees of the changes and ask them to submit applications before the January payments.
- The employer can provide a sample application form, refer to EAMT instructions, and compile application information for payroll purposes.
- Applications must be to maintain in accounting, to prove the correctness of tax calculations if necessary.
Kokkuvõte
The 2026 tax-exempt income reform is not just a technical change. This turning point is the biggest simplification of the Estonian tax system in recent years, meaning more money, less bureaucracy and clearer rules. The change will therefore support consumption and economic growth.
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