Exempting average pension from income tax to cost €100 million

Today, pensioners have to pay income tax for all income over €500 a month. Photo: Arvo Meeks / LEPM

The finance minister has sent out for coordination a bill to exempt average pension from income tax. The opposition Isamaa party says the amendment was stuck behind the Center Party in the previous government.

The 2016 income tax reform introduced by the government of Isamaa, the Social Democratic Party (SDE) and Center moved Estonia’s basic exemption rate to €500, while the average pension grew faster. Today, pensioners have to pay income tax for all income over €500 a month.

The recent bill by the ruling government would exempt average pension from income tax from January 1, 2023.

“I have always supported this,” Aivar Kokk (Isamaa), chairman of the Riigikogu Finance Committee, told Postimees. “Isamaa was in favor of the change in the previous coalition, while Center remained opposed.”

Kokk recalls: “During both rounds of state budget talks, we proposed exempting the average pension from income tax. However, there was an extraordinary pensions hike the first time and then Minister of Social Affairs Tanel Kiik (Center) claimed that new information systems could not be developed in time. It was also on the table for this year’s budget but was not supported,” Kokk said, adding that one option discussed was to introduce a fixed tax exemption ceiling, proposed at €700 at the time.

Chairman of the Riigikogu Finance Committee Erki Savisaar (Center) responded by saying that [exempting average pension from income tax] has been a longstanding election promise for Center and that he cannot recall the party having stood in the way. Savisaar said that the change remained outstanding following fiscal considerations. “We simply could not afford both the extraordinary pensions hike and the exemption at the time.”

The fiscal situation is precisely the reason why the change is set to enter into force in January of 2023 and not next year, said Aivar Sõerd (Reform Party). The second reason is that income tax is calculated on a calendar year basis.

Exempting the average pension from income tax is estimated to cost €100 million that sends up more than a few red flags in the conditions of austerity. Sõerd said the exemption is included in the coalition agreement, admitting that the poor state of the budget and the need for cuts were clear back in January. “It has become even clearer since then. But we are talking about a political agreement and a matter of righting an injustice.”

Kokk sees no discrepancy between the bill and the fiscal situation. “The average pension income tax exemption can only be based on the second pension pillar being voluntary. Those who give up their second pillar will automatically make pension payments into the first pillar. This creates new and unexpected revenue for the state. That is what we are spending,” the opposition MP explained.

Savisaar also sees no obstacle. “Our pensions are so modest, and I believe the time is right to hike them and make sure our elderly can cope if only a little better.”

Minister of Finance Keit Pentus-Rosimannus (Reform) said the change constitutes the first stage of fixing up the income tax system. If we presume that from the point of view of the Reform Party the problem started with amendments introduced in 2017, what could be the next stages? Asked this, both Sõerd and Pentus-Rosimannus said that the state will concentrate on the first stage for now.