The tax hump that has been in force for eight years will be abolished, and from 1 January 2026, a uniform basic exemption of 700 euros per month, i.e. 8400 euros per year, regardless of the amount of a person's income, will apply. A slightly higher basic exemption – 776 euros per month (9312 euros per year) – is still automatically applied to people of old-age pension age.
The tax hump meant that starting from an annual income of 14,400 euros, the basic exemption began to decrease, and if the income exceeded 25,200 euros, the basic exemption could not be used. The calculation of the graduated basic exemption caused many to wonder whether to submit an application for the basic exemption to the employer and in what amount, so that after the end of the year, there would not be an unpleasant surprise in the form of an income tax claim if the annual income turned out to be higher than expected and therefore the level of the basic exemption was smaller.
However, from the new year, there will no longer be a need to deal with income forecasts for calculating the amount of basic exemption, as the basic exemption no longer depends on the amount of income – everyone[1] has the right to apply the basic exemption in the amount of 8400 euros per year, which brings a total tax gain of up to 1848 euros per year.
As before, in order to apply the basic exemption on an ongoing (monthly) basis, a free-form application must be submitted to the payer. Therefore, the applications submitted to the employer earlier must be reviewed and, if necessary, a new application must be submitted. If the salary for December is paid at the beginning of January, a new application must be submitted in December at the latest, so that the employer can take into account the change from the beginning of January.
700 euros can be deducted in each calendar month, which means that the employer cannot take into account the unused basic exemption in one month in the following months. If the basic exemption has not been partially or fully unused during the year for some reason, it can be taken into account by submitting a natural person's income tax return by 30 April.
As a reminder, as of 1 January 2026, the income tax rate for both companies and private persons was supposed to rise to 24%, but the income tax increase will be cancelled. Thus, the income tax rate of 22% will remain in force in 2026 as well.
[1] Tax incentives, including basic exemption, can be used by both Estonian residents and residents of the European Economic Area (EEA) who have taxable income in Estonia. In addition to the European Union member states, the EEA countries are Norway, Liechtenstein and Iceland.
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