Under the tax hike scheme agreed upon by the government, beginning July 1 next year, the value added tax (VAT) will be going up two percentage points to 24 percent, and from 2026, a 2 percent security tax will also be applied to individuals' taxable income as well as corporate profits.

This tax hike won't leave pension fund withdrawals untouched either. Namely, according to the letter of explanation accompanying the security tax bill, for the sake of broad-based taxation, some types of income currently exempt from income tax, such as all second and third pillar payouts, will also be subject to the security tax.

According to Siiri Suutre, chief specialist at the Ministry of Finance's Public Relations Department, the additional 2 percent tax will apply both to lump sum withdrawals – currently subject to a 20 percent, in the future 22 percent income tax – as well as short-term withdrawals.

Short-term withdrawals include fixed-term pension funds and fixed-term pension contracts, in which case the pension is of a shorter duration or the frequency of payments is once a year. Currently, these are subject to an income tax of 10 percent, which is set to rise to 12 percent in the future.

The additional 2 percent tax will also apply to long-term payouts, which are currently income tax exempt altogether.

This change in taxes is slated to remain in force through the end of 2028.

The Estonian government approved the 2025 state budget, with an expenditure volume of €19.1 billion and projected revenue of €17.7 billion, on September 25.

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