Estonian Taxes 2026

Starting from January 1, 2026, several important tax changes will come into effect in Estonia, affecting employees, entrepreneurs, and dividend recipients. This article provides an overview of how Estonian taxes 2026 will change. The most significant change is the elimination of the so-called "tax wedge," which significantly simplifies the tax system.

Basic Exemption (Tax-Free Income)

In 2026, the progressive basic exemption system (tax wedge) will be eliminated. All employees will have equal tax-free income regardless of their income level:

•       General basic exemption: €700 per month or €8,400 per year

•       Pensioners' basic exemption: €776 per month or €9,312 per year

•       Income tax rate: 22% (remains the same as in 2025)

Important: To apply the basic exemption, an employee must submit a written application to their employer. The application can only be submitted to one employer. If the employee does not submit the application, the employer must withhold income tax from the first euro.

Impact of Eliminating the Tax Wedge

In 2025, a complex system was still in effect where the basic exemption decreased as income increased. For example, in 2025, the basic exemption was up to €654 per month (€7,848 per year), but it decreased gradually, and individuals with annual income over €25,200 had zero basic exemption. Starting in 2026, the basic exemption will no longer depend on income level, making the tax system significantly simpler and more transparent.

Dividend Income Tax

Since the beginning of 2025, a uniform income tax rate has applied to dividend payments. The same system continues in 2026: companies pay income tax on dividends at a rate of 22/78 (in other words, 28.21% on the net amount). Estonia's cash-based tax system remains in effect, meaning profit is taxed only at the time of distribution. This gives companies the flexibility to reinvest profits without immediate tax liability.

Other Important Estonian Taxes 2026

Social Tax

The monthly base for the minimum social tax obligation is €886, on which 33% social tax must be paid, resulting in a minimum obligation of €292.38 per month. Unemployment insurance contributions are 1.6% for employees and 0.8% for employers.

Motor Vehicle Tax

In 2026, the motor vehicle tax (car tax) remains in effect. The tax is paid by all owners or authorized users of motor vehicles registered in the traffic register as of January 1. The tax must be paid in two installments: by June 15 and December 15.

For families with children: The car tax is reduced by up to €100 per child under 18 years of age. The reduction is calculated automatically, and people do not need to submit an application.

Tax Benefits on Income Tax Return

On the 2026 income tax return (to be submitted in 2027), the following deductions can be made from taxable income:

•       Basic exemption €8,400 per year or €9,312 for pensioners

•       Training costs and donations up to €1,200 in total

•       Third pillar pension contributions up to 15% of taxable income, but not more than €6,000 per year

On October 1, 2025, the list of training costs was expanded to include private daycare centers and private kindergartens with appropriate operating licenses.

Summary

Estonian taxes 2026 bring simplification to the tax system, primarily through the elimination of the tax wedge. It is important to remember that to use the basic exemption, an employee must submit an application to their employer, and the application can only be submitted to one employer. Dividend taxation continues with a uniform rate of 22/78, and the cash-based system continues to give companies the opportunity to reinvest profits.