Income tax remains at 22%
In early December, the Riigikogu adopted amendments to the Income Tax Act under which the income tax increase planned for 2026—from 22% to 24%—will not take place.
There will be no corporate profit tax
Although a 2% corporate profit tax was initially planned to enter into force on 1 January 2026 as part of the security tax, the Riigikogu abandoned the introduction of a corporate profit tax in June this year.
The so-called tax wedge will be abolished
From 2026, the so-called tax wedge for individuals will be eliminated and a uniform tax-free allowance of 700 euros per month, or 8,400 euros per year, will apply. For example, if a person earns 2,100 euros per month or more and uses the tax-free allowance to the maximum extent, the employee will receive 154 euros more per month from the new year than at present. To use the tax-free allowance in full, the employee must submit a relevant application to their employer. If the employee works for multiple employers, the application may be submitted to only one employer.
For people of retirement age, the tax-free income from the new year will be 776 euros per month, or 9,312 euros per year.
The minimum social tax obligation will increase
From 2026, the monthly base amount for the minimum social tax obligation will be 886 euros. This means that, instead of the current 270.6 euros, the employer must pay at least 292.38 euros per month in social tax for the employee to acquire social insurance coverage. The change affects employers whose employees work part-time and whose monthly salary is below 886 euros.
A cap will apply to temporary incapacity for work benefits
From 1 January 2026, a cap will apply to temporary incapacity for work benefits paid by the Health Insurance Fund. In 2026, the cap will be 126.87 euros per day. Currently, the law does not provide for a cap.
The tax rate on business income paid into an entrepreneurship account will not increase
Although the tax rate on business income paid into an entrepreneurship account was initially planned to rise from the current 20% to 22% from the new year, the Riigikogu decided in December to cancel the tax increase. Thus, the tax rate will remain 20% of the amount paid into the entrepreneurship account.
The unemployment insurance system will change
From 2026, in the event of job loss, the Unemployment Insurance Fund will pay a registered unemployed person either income-based unemployment insurance benefits or a new flat-rate unemployment insurance benefit.
Income-based unemployment insurance benefits are the current unemployment insurance benefits, and the conditions for receiving them will not change. As before, the benefit is paid to people who have at least 12 months of unemployment insurance coverage within the last three years and who did not leave their job at their own initiative, by agreement with the employer, or due to misconduct. For the first 100 days, the benefit is 60%, and thereafter 40%, of the average daily wage of one calendar day.
If a person does not qualify for income-based benefits, the Unemployment Insurance Fund will instead pay a flat-rate unemployment insurance benefit. This will replace the current unemployment allowance. The flat-rate benefit is granted to a person who has worked for at least 8 months during the three years preceding registration as unemployed. The benefit is paid for up to 180 days, which may be extended by 60 calendar days if the labour market situation is difficult, and the benefit amount is the same for everyone—50% of the minimum wage of the previous calendar year. In 2026, the benefit amount will be 374.50 euros per month.
Changes related to foreign labour
From the new year, a requirement will apply when registering short-term employment in Estonia and when granting a temporary residence permit for employment: the employer must be entered in the Estonian Commercial Register. This means that foreigners can no longer be employed, for example, by branches that are not entered in the Estonian Commercial Register. The requirement to be entered in the Commercial Register does not apply if the employer of the foreigner is a public-law legal entity. An employer located in another country may invite foreigners to work in Estonia only in the case of the free movement of services or posting to Estonia from a Member State.
From 1 January, an employer for whom a foreigner applies for a temporary residence permit for employment must have had actual economic activity in Estonia for at least six consecutive months immediately prior to submitting the residence permit application. Employers may prove actual economic activity by any evidence, including their own explanations and documents such as contracts, annual reports, certificates issued by competent authorities, and tax declarations.
A positive change for temporary employment agencies is that, from 1 January, the requirement for an agency to provide a security of at least one month’s salary of the foreign employee in order to employ a foreigner will be abolished. The security requirement will be replaced by a requirement that, before employing a foreigner, the temporary employment agency must have had actual economic activity for at least six consecutive months in Estonia or another European Economic Area Member State.
From the new year, the processing time for temporary residence permit applications will also be extended from the current two months to 90 days.