The explanatory memo of amendments to the Income Tax Act reads that the basic exemption of natural persons over the retirement age will be set at €776 a month or €9,312 annually.

"The bill serves two purposes. First, the change is expected to yield tax revenue, which is in line with the government's 2024-2027 fiscal strategy. This will be achieved through various tax changes, including a cap on the basic exemption of people over the retirement age," it states.

The memo reveals that revenue of €17 million is expected in 2025, €36 million in 2026, €55 million in 2027 and €76 million in 2028. For a total of €184 million over four years.

The document also shows average pensions in 2025-2028 before and after the exemption cap, based on the Ministry of Finance's undisclosed spring economic forecast.

The average pension before tax would be €819 and net pension €810 in 2025, rising to €860 and €842 the next year. In 2027, the average gross pension should be €896 and net pension €870, which should hit €933 and €898 respectively by 2028.

To compare, the average old-age pension went from €700 to €774 from April 1 this year.

Starting from 2025, the basic exemption will be set at €700 monthly or €8,400 annually for all natural person residents, irrespective of how much they earn. This means people over the retirement age would get a larger basic exemption.

That said, the coalition agreement of the Reform Party, Eesti 200 and the Social Democratic Party (SDE) includes the promise of "keeping the average old-age pension exempt from income tax," which was also one of the Reform Party's chief election promises for the last general election.

On March 7, Prime Minister Kaja Kallas (Reform) explained that dropping the tax-free pensions plan is necessary to cut public spending and invest in national defense.

Minister of Social Protection Signe Riisalo (Reform) added that what Estonia spends on pensions will grow by over a billion euros between now and 2027 through indexation alone and by €220 million this year.

The memo goes on to state that the larger exemption of those over the retirement age contributed to inequality in that beneficiaries were treated differently based on their age.

"The described inequality levels out as the tax-free income for those reaching retirement age is fixed, and from next year, the regressive tax-free income (Estonia's so-called tax hump – ed.) will be replaced with a general tax-free income system. Thus, we are moving towards a uniform and simple income tax system again," it is noted in the explanatory memorandum of the bill, which Riisalo sent for coordination.

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