The tax-free income of the retirement pension also affects the salary payment

From January 1, 2023, a separate tax-free income will apply to people who have reached retirement age, which will also have an impact on the activities of entrepreneurs. As of new year, the tax-free income of old-age pensioners is 704 euros per month. If the pension is lower than the average pension, the pensioner has the opportunity to use the remaining tax-free income from other income, such as salary.  

Thanks to the new amendment, the average old-age pension in Estonia remains free from income tax, and the income tax exemption does not decrease as the pension increases or if a person who has reached retirement age continues to work. For this purpose, separate tax-free income calculation rules are established for people who have reached retirement age. 

Income tax exemption for old-age pensioners
From the new year, tax-free income in the amount of 704 euros per month applies to all old-age pensioners. In 2023, the old-age pension age will be 64 years and 6 months, and next year people born before July 1, 1959 will reach the old-age pension age. The change applies to all pensioners of old-age pension age, i.e., also those who are of retirement age, but have postponed receiving their pension. In addition, the system applies to those who reach the old-age pension age in 2023. For example, if a person reaches retirement age in May 2023, then in this case the tax-free income is calculated in the amount of the average retirement pension from the beginning of the year, i.e., from January 1. For those who are not of retirement age and will not reach it during 2023, the current tax-free income system will remain.

There is no longer a choice regarding the calculation of tax-free income, and therefore the Social Insurance Board is always the first to deduct tax-free income in the amount of 704 euros from a person's pension. Therefore, persons who have reached the retirement pension age, who only receive a pension, or whose pension exceeds the average old-age pension, do not have to do anything to deduct the tax-free income of their old-age pension.

However, if the pension is less than 704 euros per month, the remaining tax-free income can also be used from other incomes, such as salary. For example, if the amount of the pension is 600 euros per month and the salary is 900 euros, then the Social Insurance Board calculates the income tax-free minimum of 600 euros from the pension, i.e., the entire pension is income tax-free. In this case, however, the income tax-free minimum of 104 euros can be used from the salary (704-600=104).

The application for using the remaining tax-free income must be submitted to the employer
If the pension is less than 704 euros per month or the person has postponed his pension, there will be a balance of tax-free income of old-age pension, which can be used for other taxable income. So, for example, if the old-age pension age has been reached, but receiving the pension has been postponed, the entire tax-free income can be used at once with the employer. However, in order to use this tax-free balance and the system, an application must be submitted to the payer, that is, for example, to the employer. An application for using the remaining tax-free income must be submitted, and it must also indicate the unused amount of tax-free income, which the employer takes into account when making payments to the person. The employee is responsible for the correctness of the amount. If the application is not submitted to the employer, the pensioner can deduct the balance of the tax-free income from his taxable income by submitting the natural person tax return. 

The employer is also recommended to increase the awareness of the old-age pensioners about the fact that if the pensioners' pension is less than the average pension, i.e., 704 euros per month, or if they have postponed their pension, they should submit an application to the employer to calculate the tax-free income of the old-age pensioner. 

As a result of the change, from January 1, 2023, the employer's accountants must distinguish between employees who have reached the old-age pension age and others. Accordingly, in the case of pensioners, apply the balance of the tax-free income applicable to persons who have reached the old-age pension age, and in the case of other employees, the general tax-free income. 

The legal basis for income tax exemption can be found HERE. 

If you have any questions about the tax-free income system for people who have reached old-age pension age, please contact the Chamber's lawyers at juristid@koda.ee.