On 1 January 2018, a new accounting system for calculating non taxable income will apply. The maximum applicable amount will be 500 euros per calendar month instead of the current 180 euros.
Additionally, a new minimum wage rate will apply, which will be 500 euros per month and 2.97 euros per hour gross. The minimum wage will be calculated on an accrual basis, i.e. starting from January, the salary for full time work may not be lower than the abovementioned amount.
Non taxable income – how is it calculated?
The increase in non taxable income is a positive news, but not to all employees. If the income of a person exceeds 1,200 euros in a calendar month, the tax-exempt amount will start to gradually decrease. Anyone who earns a gross monthly income of up to 1,776 euros will benefit from this tax change. This is the limit where the applicable tax-exempt amount is 180 euros per month (this is the same as today’s limit). After this, the tax-exempt amount will start to decrease, reaching 0 euros per month (if the monthly income is 2,100 euros or more).
How to calculate your monthly tax-exempt amount? In order to calculate your monthly tax-exempt amount, do as follows: 500 – 500/900 x (your income – 1200). In terms of income, gross salaries are always considered.
And now a more detailed overview. Income tax exemptions are applied on an accrual-basis, i.e. the first month from which new payment system is applied, is January 2018.
Accountants are not aware of employees’ income outside the company’s wage calculation, which is why every employee has to predict the level of his / her annual income and submit the employer an application for the correct calculation of the tax-exempt amount.
The annual income includes:
- salaries and other remuneration (holiday pay, sick pay, bonus, etc.),
- remuneration received pursuant to a contract under the law of obligations,
- business income,
- taxable profit from the transfer of property,
- rental and lease income,
- license and interest income,
- taxable pension,
- taxable grants and scholarships.
The annual income does not include tax-exempt allowances, grants and scholarships, and other tax exemptions (i.e. the sale of housing or movable property in personal use), which is not declared in a natural person income tax return.
How to predict your annual income and in what amount is it necessary to do the application to your employer?
- If your income is under 1,200 euros per month (annual income is under 14,400 euros) and you believe you definitely will not receive any additional income, the current application remains valid and you do not have to do anything.
- If you don’t know the amount of your annual income, you can check your annual income of last year from the E-Tax website (www.emta.ee). After logging in, you will see right on the front page a quick link to TSD consolidated data. From there, you can check the income of the previous years as well as the current year, the used tax-exempt amount and paid taxes.
- If your income is in the range of 1,200-2,100 euros per month (annual income 14,400-25,200 euros), then you have three options, the most conservative of which is the first one:
- You choose to not calculate your non taxable income and submit a respective application. If at the end of the year, it appears that you were entitled to tax exemption (over the yearly period), you get a refund from the overpaid amount after the submission of the tax return.
- You leave the current application valid and the accountant will take into account the maximum legally allowed exemption per month. By choosing this option, you must take into account that after the submission of the tax return, you must pay the state back the income tax that was not deducted from your income.
- You calculate the maximum tax-exempt amount as precisely as possible and submit a respective application. This, however, still has the risk that you might need to pay back the income tax after the submission of the tax return.
In order to find the monthly tax-exempt amount, you can use the following formula – 500-500/900 x (your income – 1200).
- If your average monthly income is over 2,100 euros, you should submit an application to not calculate the tax-exempt amount. If you do not submit this application and there is a month where your income remains under 2,100 euros, the accountant shall calculate the tax exemption automatically, which means that there is a high chance you have to pay it back after the submission of the next year’s tax return.
In the case of an employee who calculates today the tax-exempt amount and does not make a new statement to the employer, the maximum tax-exempt amount of 500 euros shall be automatically applies from 2018.
If during the year, maximum tax-exempt amount has been calculated from the income that happens to be over 25,200 euros, the amount returnable to the Estonian Tax and Customs Board is 1,200 euros (500*20%*12 months).
A written application for tax exemption can be later changed once a month. The deadline for the submission of the application can be determined by the employer within the company and the tax-exempt amount shall apply from the payments of next month.
The Estonian Tax and Customs Board has submitted some examples and disclosed its positions, which are available here https://www.emta.ee/et/maksuvaba-tulu.
In conclusion, each employee must make a choice in determining his / her non taxable income and if he / she does not wish to apply the maximum amount of 500 euros, a respective application must be submitted to the employer. It’s up to you whether you want to receive more income on a monthly basis and repay part of the money back in the next year’s tax return, or vice versa – you will receive less money on a monthly basis and you will receive a higher return after the submission of your income tax return.
Finally, there is a recommendation for this year – if your next year income will be less than 2,100 euros a month next year and you know the additional income you will receive during the beginning of 2018, it would be wise to withdraw this income at the end of 2017, if possible.