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New tax-free minimum in Estonia from 2026 and its impact on payroll calculations

On 1 January 2026, one of the most eagerly awaited changes in recent years will come into force in Estonia: a new fixed tax-free minimum for income tax. This will mean greater transparency and predictability for employees, and simpler calculations and fewer errors for employers and accountants.

At first glance, the change may seem minor. However, it will directly affect payroll calculations, employee registration, tax returns and the company’s responsibilities as a tax agent.

This is how the tax-free minimum worked until 2026:

Until now, Estonia’s tax-free income system was one of the most confusing. The maximum tax-free minimum was formally €654 per month, but this did not apply to everyone. It decreased as the employee’s annual income grew, disappearing completely after a certain threshold was reached.

In practice, this meant that:

Employees did not always understand what their ‘net’ salary would be; accountants had to take into account the estimated annual income; recalculations were required when income changed during the year; and at the end of the year, employees often faced additional tax payments.

The system was inconvenient for employers too: any errors when applying the tax-free minimum would result in questions from the Tax and Customs Department.

What will change from 1 January 2026?

From 2026, Estonia will abandon the model of a decreasing tax-free minimum. Instead, a fixed tax-free minimum of €700 per month or €8,400 per year will be introduced for all able-bodied individuals.

The key idea behind the new system is simplicity and equal rules for everyone.

The size of the tax-free minimum will not depend on income level; there will be no gradual reduction or ‘tax hump’; salary calculation will become linear and predictable.

Separate rules and a higher tax-free minimum will remain in place for pensioners, which will be applied automatically through government agencies.

Comparison of the old and new tax-free income systems

Indicator Until 2026 From 2026
Maximum tax-free minimum €654 €700
Dependence on annual income Yes No
Decrease with income growth Yes No
Risk of additional tax payments at the end of the year High Minimal
Complexity of salary calculation High Low

How does the new tax-free minimum affect salary calculation?

This change is important because it affects salary calculation. From 2026, accountants will no longer need to analyse employees’ estimated annual incomes, recalculate the tax-free minimum, or adjust it when salaries change.

If an employee has applied to their employer for the tax-free minimum to be applied, €700 per month will simply be deducted from the tax base and income tax at a rate of 22% will be applied to the remaining amount.

This makes payroll calculation:

  • faster
  • more transparent
  • less susceptible to human error

Example of salary calculation in 2026

Example:
Employee’s gross salary: €2,000
Tax-free minimum: €700

Income tax base: €2,000 – €700 = €1,300

Income tax (22%): €1,300 × 22% = €286

There are no complicated formulas, coefficients or recalculations. Employees can immediately see how much tax is being withheld and why.

What this means for employers and business owners:

For companies, especially small and medium-sized businesses, the new tax-free minimum is not only beneficial, but also obliges them to set up processes correctly.

The employer must still:

  • apply the tax-free minimum only if the employee has submitted a request;
  •  be responsible for correctly calculating salaries;
  • reflect the data in the TSD declaration.

Incorrect application of the tax-free minimum can still lead to tax arrears, especially if an employee works for several employers. The only difference is that the system itself has become simpler, meaning errors are now more often due to a lack of control than to the rules themselves.

Impact on the wage fund and personnel policy

Although the new tax-free minimum does not reduce the employer’s direct taxes, it affects how employees perceive their salaries. With the same gross salary, employees will receive slightly more ‘in hand’, which is particularly noticeable in the low and middle income brackets.

For businesses, this means:

  • less pressure to increase gross salaries;
  • clearer calculations when hiring employees;
  •  simplified communication with staff on salary and tax issues.

We expect to see the following typical mistakes in 2026

In practice, even with a simplified system, companies often encounter the same issues:

  • lack of or incorrect completion of employee applications;
  •  application of the tax-free minimum by several employers;
  • errors during the transition from 2025 to 2026;
  •  inconsistencies between payroll systems and TSD declarations.

This is where the role of the accountant becomes critically important, acting not as a formal executor, but as a controlling and consulting partner of the business.

Why is this important right now?

2026 will be the first year in which the new system will be fully implemented without any transition periods. This means that mistakes made at the beginning of the year could go unnoticed for months, only becoming apparent during the annual audit or when filing a declaration.

For entrepreneurs, this is another argument for not postponing the adjustment of payroll processes and for checking in advance: calculation formulas, internal procedures and the correctness of accounting systems.

The new tax-free minimum from 2026 is a step towards common sense. The system is becoming simpler, fairer, and easier to understand for both employees and employers. However, as always with taxes, simplicity does not mean a lack of responsibility.

For companies doing business in Estonia, correctly calculating wages remains a key area of focus. This is where professional accounting plays a key role, not only in calculations, but also in preventing costly mistakes.