You are here

Calculating the amount of tax-free income on the TSD declaration changes beginning from 1 January 2018

The calculation of basic exemption (the amount of tax-free income) changes beginning from 1 January 2018 regarding withholding income tax.

In year 2018:

  • monthly payment up to 1200 euros gives 500 euros as basic exemption,

  • when the monthly payment increases from 1200 euros to 2100 euros, the basic exemption decreases according to the following formula: 500 – 500 ÷ 900 × (payment – 1200),

  • if monthly payment is above 2100 euros, basic exemption is 0.

Basic exemption cannot be smaller than 0.

In case of a monthly payment of 1500 euros, basic exemption 333.33 is calculated as follows:

  1. 1500 – 1200 = 300
  2. 500 ÷ 900 = 0.55556
  3. 0.55556 × 300 = 166.67
  4. 500 – 166.67 = 333.33 euros

Payment is the gross amount (e.g. gross salary) from which income tax, unemployment insurance premiums and mandatory funded pension payments are withheld.


Monthly calculation of basic exemption when withholding income tax


A withholding agent (e.g. an employer) can base the calculation of basic exemption on the TSD declaration (declaration of income and social tax, unemployment insurance premiums and contributions to mandatory funded pension) on monthly payment.

This means that since the beginning of the new calendar year, the calculation in total of the basic exemption is no longer possible and in case a payment is not made to a person on certain month(s), then the basic exemption is not calculated for this month (e.g. in connection to the person’s holiday or sickness leave).

Additionally, as the basic exemption increases up to 500 euros and the increased basic exemption on pensions and compensation for incapacity for work cannot be used. This means that payment types 620 and 630 are no longer used on the TSD declaration.

The withholding agent (e.g. an employer) can calculate the summarized payments since the beginning of a calendar year (in case payment amounts differ in months or payments are not made each month) and find the respective basic exemption according to the person's annual income according to the formula: 6000 – 6000 ÷ 10 800 × (income amount – 14 400).

More on calculating annual income and basic exemption »

If the withholding agent finds according to the current year’s tax calculation that based on annual income the person does not have the right to use the basic exemption further (e.g. the person has received performance pay, awards, dividends or other remunerations), it is possible to notify the person during the year and not to apply the basic exemption further this year.

The electronic TSD declaration application gives a notice when the withholding agent’s payments starting from the beginning of the year do not allow to calculate the basic exemption on annual basis for this certain person.

 

The application for basic exemption

For applying the basic exemption, only one employer (the withholding agent) has to have an application from the person. An employee who works at several jobs has to take into account that (s)he is entitled to use the basic exemption on one job only.

A pensioner employed, who receives a pension and a salary less than 500 euros, is entitled to use the basic exemption at two places and submit an application both to the employer and the Social Insurance Board. It is important to keep in view that a pensioner employed may divide the basic exemption in the amount of 500 euros between the employer and the Social Insurance Board.

Example

The pension of a person is 416 euros and the salary is 300 euros. The person has the right to submit an application to the Social Insurance Board for the use of the basic exemption amounting to 416 euros and an application to the employer for the use the basic exemption in the amount of 84 euros.


The person can authorize the withholding agent:

  • to calculate the basic exemption or

  • not to calculate the basic exemption or

  • to calculate the basic exemption in a specific amount, e.g. 100 euros per month (if the basic exemption amount according to the formula is smaller than the amount in the person’s application, then the withholding agent has to use the amount calculated by using the basic exemption formula).

When a person works at several employers at the same time, social tax according to monthly rate is paid by the employer who the employee has chosen to be the applicant of the basic exemption when withholding income tax. It is therefore important to submit the application for basic exemption in the situation where the employee wishes for the employer to calculate the basic exemption of 0 euros and the employee has more than one employers.

It is recommended to submit one application per year.

Persons who receive different amounts of remunerations in different months (e.g. additional remuneration, performance pay, awards) may change the application during the year. The application can be changed once a month.

Tax payers who receive income from different sources (e.g. salary from different employers, income from rent, dividends, gains from transfer of property etc.) have to consider their monthly basic exemption amount and notify the withholding agent of it.

For example, when a person works in two jobs and receives monthly gross salary of 800 euros from one job and 600 euros from second job, then the person has the right to apply 500 euros of basic exemption in one workplace. However, according to the income tax return, this person’s annual income is 16 800 euros, which gives the right to the basic exemption of 4666.67 euros annually (6000 – 6000 ÷ 10 800 × (16 800 – 14 400)), i.e. 388.89 euros monthly (4666.67 ÷ 12). It is therefore rational for the employee to notify the employer and indicate in the application not to be calculated the basic exemption in full (500 euros), but in a smaller amount, e.g. 350 euros per month.

It is also recommended for withholding agents to review formerly submitted applications in the November or December of 2017 and to point out to employees that since 2018, they may allow the employer not to calculate the basic exemption at all or to apply the basic exemption in a smaller amount (less than 500 euros or a smaller amount than calculated by the basic exemption formula).

In case a person finds it difficult to predict the total annual income or it is known that the annual income is above 25 200 euros, it is possible not use the basic exemption during the year. In case the basic exemption has been monthly calculated in a larger amount the income tax return based basic exemption calculation allows, the person has to pay additional income tax.
 

Calculation and control rules of the TSD declaration

The file structure of the TSD Annex 1 does not change. Only the calculation and control rules of the basic exemption change.

Calculation and control rules of the basic exemption on the TSD declaration
  • Monthly basic exemption calculation in case of gross salary from 1200 euros to 2100 euros is done according to the formula: 500 – 500 ÷ 900 × (payment – 1200). The quotient of the formula (500 ÷ 900) is not rounded up. The calculated basic exemption is rounded up to two decimal places.

  • In case of several monthly payments and/or different payment types (e.g. employment income payment types 10, 11, 12; board member fee payment type 21; sickness benefit payment type 24) all payments (except payment type 14 (childbirth allowances paid to an employee in the range of the income tax free limit) and payment type 36 (payments made for compensation of representation to the Chief Justice of the Supreme Court)) have to be summarized and the basic exemption is calculated on this summarized amount by using the formula 500 – 500 ÷ 900 × (payment – 1200). Basic exemption amount cannot exceed what the total amount of all monthly payments and/or different payment types allow for consideration. This means that by making several monthly payments and/or different types of payments it is necessary to recalculate the basic exemption and correct the withheld income tax amount with every next payment.

  • The procedure of refund or offset of payments and declaring on the TSD declaration Annex 1 Part 1b does not change, The amounts declared on the TSD declaration Annex 1 Part 1b which are refunded or offset and deducted do not affect the calculation of basic exemption on the TSD Annex 1 Part 1a.

  • Childbirth allowances paid to an employee in the amount up to 2500 euros (5 ÷ 12 × 6000) is tax free. In case of birth of multiple children the tax exemption can be applied for each child (e.g. the childbirth allowances paid for twins is tax free to the extent of 5000 euros (2 × 2500)). The support paid up to the extent of tax exemption is taxed with social tax, unemployment insurance premiums and in case of obligated person with mandatory funded pension payment (declared on the TSD declaration Annex 1 with payment type 14).

The employer (the withholding agent) may keep additional records of the employees’ annual basic exemption calculation in their accounting programme. If the employer summarizes in their accounting programme all payments made to the employee from the beginning of the year (except payment types 14 and 36), then the employee’s year-based basic exemption is calculated according to the formula: 6000 – 6000 ÷ 10 800 × (income amount – 14 400). This gives the employer the information on when to advise the employee to change his/her application for basic exemption. When the employee receives different income amounts monthly, (s)he may appreciate the advice and help from the employer.

The electronic TSD application considers only monthly basic exemption calculation and gives a warning if one withholding agent’s payments to this employee since the beginning of the calendar year do not allow to calculate year based tax free exemption no longer. Though, this warning allows to confirm the TSD declaration.

The tax payer has to base the tax calculation and submitting the TSD declaration on monthly basic exemption calculation!


Examples


The following examples describe the aforementioned situations.

Example 1. Month based calculation of basic exemption


The employee has received different amounts of gross salary each month during a year. The employer (the withholding agent to whom the employer has submitted the application for calculating basic exemption) has applied month based basic exemption (abbreviation BE in tables) calculation on salary payments as follows:

Month Employment income
TSD code 1030
Month based BE calculation TSD code 11601 Year based BE calculation
January 800 500 6000
February 900 500 6000
March 1100 500 6000
April 1250 472.22 6000
May 1300 444.44 6000
June 1400 388.89 6000
July 1600 277.78 6000
August 900 500 6000
September 1000 500 6000
October 1300 444.44 6000
November 2100 0 6000
December 600 500 6000
Total 14 250 5027.77  

1 500 – 500 ÷ 900 × (employment income – 1200)

The employee’s gross employment income is 14 250 euros per year and if he/she does not have any additional income, he/she has the right to use the basic exemption of 6000 euros per year. As the employer has applied the total basic exemption of 5027.77 euros, the employee has the possibility to submit an income tax return and can receive a refund of the overpaid income tax.

Example 2. Year based calculation of basic exemption


a) The employee has received different amounts of gross salary each month during a year. The employer (the withholding agent to whom the employer has submitted the application for calculating basic exemption) has applied month based basic exemption calculation on salary payments as follows:

Month

Employment income TSD code  1030

Summarized employment income since beginning of year Month based BE calculation1 Year based BE calculation2 Declared BE
TSD code 1160
January 1800 1800 166.67 6000 166.67
February 1700 3500 222.22 6000 222.22
March 1300 4800 444.44 6000 444.44
April 1800 6600 166.67 6000 166.67
May 1900 8500 111.11 6000 111.11
June 2000 10 500 55.56 6000 55.56
July 2200 12 700 0 6000 0
August 2800 15 500 0 5388.89 0
September 3800 19 300 0 3277.78 0
October 3000 22 300 0 1611.11 0
November 2900 25 200 0 0 0
December 1500 26 700 333.33 0 333.33
Total 26 700       1500
1500 – 500 ÷ 900 × (employment income – 1200)

2 6000 – 6000 ÷ 10 800 × (summarized employment income – 14 400)

Employee’s gross employment income is 26 700 euros per year and he/she does not have the right to apply basic exemption according to income tax return. If the employee does not change the application for basic exemption in November then the basic exemption of 333.33 euros applies for December payments. The TSD application gives a warning when submitting the TSD declaration that the summarized payments made to the person since the beginning of the year exceed 25 200 euros and does not enable to calculate the year based basic exemption amount, but does allow to submit the TSD declaration with given numbers. The employee submits the natural person’s income tax return and has to pay additional income tax according to the return from 1500 euros in the amount of 300 euros (1500 × 20% = 300).

b) The previous example, but the employee changes his/her application for basic exemption in November (indicates the basic exemption as 0 euros) and the employer applies the month based basic exemption to gross employment income as follows:

Month

Employment income TSD code 1030

Summarized employment income since beginning of year Month based BE calculation1 Year based BE calculation2 Declared BE
TSD code 1160
January 1800 1800 166.67 6000 166.67
February 1700 3500 222.22 6000 222.22
March 1300 4800 444.44 6000 444.44
April 1800 6600 166.67 6000 166.67
May 1900 8500 111.11 6000 111.11
June 2000 10 500 55.56 6000 55.56
July 2200 12 700 0 6000  
August 2800 15 500 0 5388.89  
September 3800 19 300 0 3277.78  
October 3000 22 300 0 1611.11  
November 2900 25 200 0 0  
December 1500 26 700 333.33 0  
Total 26 700       1166.67
1 500 – 500 ÷ 900 × (employment income – 1200)

2 6000 – 6000 ÷ 10 800 × (summarized employment income – 14 400)

As the employee changes the application for basic exemption then the employer does not apply basic exemption when withholding income tax on December payments. The employee submits the natural person’s income tax return and has to pay additional income tax according to the return from 1166.67 euros in the amount of 233.33 euros (1166.67 × 20% = 233.33).

Example 3. Calculation of monthly basic exemption in case of several and/or different types of payments


a) A person receives gross employment income of 1000 per month according to the employment contract and fee of 800 euros per month according to the board member agreement. The withholding agent declares the payment of 1800 euros (1000 + 800) on the TSD declaration each month and applies the basic exemption of 166.67 euros (500 – 500 ÷ 900 × (1800 – 1200)).

The withholding agent can decide upon submission of the TSD declaration whether to declare the basic exemption of 166.67 euros with employment income (payment type 10) or with board member fee (payment type 21). It is also possible to divide the basic exemption between different payment types.

b) Employer pays gross employment income of 1000 euros to employee on 3 March and applies the basic exemption of 500 euros. The employer withholds the mandatory funded pension payment of 20 euros (1000 × 2%), unemployment insurance premium (1000 × 1,6%) of 16 euros and income tax of 92.80 euros ((1000 – 20 – 16 – 500) × 20%) on 1000 euros.

Additionally, the employer pays holiday pay of 600 euros to the employee on 30 March. As the total is 1600 euros (1000 + 600), the basic exemption for March is 277.78 euros (500 – 500 ÷ 900 × (1600 – 1200)).

Therefore, it is required to declare on the TSD declaration the gross employment income of 1600 euros from which the mandatory funded pension payment of 32 euros, unemployment insurance premium of 25.60 euros and income tax of 252.92 euros ((1600 – 32 – 25.60 – 277.78) × 20) has been withheld. The employer has to take into consideration the need to correct the amount of income tax withheld upon payment of holiday pay and to pay out a respectively smaller amount to the employee.

 

If you need any assistance


Please send your questions regarding the TSD declaration to the email address ariklient@emta.ee.
 

07.03.2018