From 1 January 2023, the regressive tax exempt basic allowance (which in 2022 may be under certain conditions generally up to EUR 6000 per annum and in 2023 up to EUR 7848 per annum) will not be applied upon income taxation, starting from the taxation period, when the individual reaches the retirement age. Instead, the income of such individuals will be subject to fixed tax exempt allowance equal to the average old-age pension, regardless of the amount of their annual taxable income. The amount of average old-age pension for the taxation period is established with the Budget Act of the respective financial year. For the year 2023, the average old-age pension is EUR 704 per month.
Therefore, the general tax exempt basic allowance will be no longer applicable to individuals who have reached the retirement age. If the individual reaches the retirement age during the taxation period, then the tax exempt allowance equal to old-age pension will be applicable to that individual from the 1 January of the respective calendar year.
The new tax exempt allowance equal to old-age pension will be applicable to tax residents of Estonia and other EEA member countries, who are or reach the retirement age during the respective year. Tax residents of third countries cannot apply in Estonia any general tax exempt basic allowance or tax exempt allowance equal to old-age pension.
As the taxation period for individuals is a calendar year, then the annual tax exempt allowance equal to old-age pension is 12-fold average monthly old-age pension (i.e. EUR 8448). The tax exempt allowance equal to old-age pension is applicable to whole taxation period even when the individual reaches the retirement age at any time during the taxation period (e.g. in October). In such a case, the general tax exempt basic allowance will be applied to that individual from the 1 January of that year.
According to the new order of allowance, the 20% income tax should be withheld on the payments of income made to such old-age pension individual, which exceed EUR 704 per month. Thus, firstly the Social Insurance Board will apply the tax exempt allowance equal to old-age pension. However, if the pension of the individual is less than that allowance or if the individual has postponed his/her pension payments, then the residual amount of unused allowance can be applied upon other payments of taxable income. For this purpose, the individual should submit an application to the entity, which makes these taxable payments to the individual. As an exception, the requirement for submitting application does not apply to payments made by the Social Insurance Board and Pension Centre, which will apply in any case the tax exempt allowance equal to old-age pension. If this allowance is not applied on a monthly basis during the calendar year, then the individual is entitled to apply the allowance as a deduction from his/her taxable income in the annual individual income tax return.
Any individual who has reached the retirement age is entitled to apply the new tax exempt allowance, regardless of their status as a retired person or type of pension. If the individual was not a tax resident of Estonia or other EEA member country during whole taxation period, then that individual can apply tax exempt allowance equal to old-age pension in proportion to the number of months, when that individual was tax resident of Estonia or other EEA member country.
Additional information on tax exempt allowance equal to old-age pension can be found at the website of the tax authorities: