The amendments' main aim is to postpone the implementation of a unified income tax-free income threshold, of €700 per month within one year, to 2026.

The policy, which will have the effect of punting the abolition of the so-called "tax hump" one year down the road, has been issued in response to the situation facing state finances at a time when the 2025 state budget is being drawn up.

The ministry said that if the "tax hump" policy, one which the Reform Party had promoted, were not delayed in its implementation, a state budget deficit of no more than 3 percent as required under EU law could not be attained.

Without these changes, the deficit would exceed the allowed three percent threshold, the ministry explained.

This means postponing the "tax hump" removal is part of a raft of policies agreed at the government level, including excise, VAT and other tax hikes, cuts to the public sector and other austerity measures, the ministry's statement read.

Under the current system, the income tax-free threshold is applied to monthly earnings no higher than €1,200, up to a maximum of €654. Above that level, the tax-free portion falls in increments, reaching zero for those earning €2,100 or more per month (gross).

The Riigikogu in 2023 voted in favor of abolishing this system by 2025, simplifying it to a unified tax-free income of €700 per month, or €8,400 annually.

A separate tax-free income threshold would apply to retirees.

Finance Minister Jürgen Ligi (Reform) said: "What was once presented as €500 for everyone was actually a tax increase initially for a minority, and soon for the majority," referring to the original tax-free threshold system.

"The removal of this system now places a significant burden on the budget, one which unfortunately requires an extra year. But taxpayers will begin to see relief from 2026," he continued.

The removal of the tax hump in 2025 was first proposed in the Reform-Eesti 200-SDE coalition agreement signed in spring 2023. A revised coalition agreement between these three parties was signed this summer as a change in prime minister required it.

The "tax hump," also known as bracket creep, is a phenomenon where inflation, including wage inflation, pushes taxpayers into higher income tax brackets. This in effect leads to a rise in income taxes without a substantial rise in real incomes.

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