By journalist Ain Alvela.
The coming year brings several new tax increases in Estonia as price increases show no signs of slowing down. At the same time the government placed the entire state apparatus on an austerity regime last year, resulting in budget cuts of 5–10% across nearly all government agencies.
The steady rise in the prices of goods and services, which has persisted for the past few years, will be compounded this year by a series of new financial burdens on Estonian residents. These include an increase in VAT, the introduction of a vehicle tax and a vehicle registration fee, and a higher income tax rate. Additionally, the rise in the minimum wage will trigger increases in fines and state fees. Meanwhile, the three-year-long economic downturn shows no signs of abating, signalling a challenging year ahead for Estonia’s government institutions, businesses, and private citizens alike.
Regarding the rising cost of living Estonia is in a worse position than its neighbours, as it is among the few European Union countries that applies the same VAT rate to food products as to other goods and services. Moreover, excise duties on alcohol, tobacco, and fuel are set to rise at the beginning of the year and again during the summer, alongside higher public transport ticket prices.
The damaged Estlink 2 cable, which connects Estonia to Finland’s electricity grid, is also driving up expenses, leading to higher electricity prices in Estonia compared to the rest of the region, particularly in winter when local production capacity is insufficient to meet demand.
Although the government has decided on tax increases, it is now attempting to mitigate the impact on residents and businesses. However, coalition partners have yet to agree on whether to lower VAT on food products or implement some form of energy price compensation. All this has created a situation where Estonia is becoming one of the most expensive countries in the European Union for various goods and services. This is already evident in energy prices and the cost of numerous food and industrial products.
According to Lauri Matsulevitš, the Bank of Estonia economist, the price growth in Estonia is largely driven by tax policy. “On the one hand, the impact of the higher VAT rate introduced at the start of 2024, which significantly influenced last year’s inflation rate, will fade by January. On the other hand, the vehicle tax and higher alcohol excise duties came into effect at the beginning of 2025,” Matsulevitš explains. “Additionally, VAT will rise to 24% mid-year, and the excise duty on diesel fuel will also increase. Overall, the Bank of Estonia expects price growth in 2025 to reach 4.3%. Without these tax hikes, inflation this year would remain slightly below 3%, while inflation across the euro area is projected to hover around 2%.”
„Overall, the Bank of Estonia expects price growth in 2025 to reach 4.3%,“ Lauri Matsulevitš, Bank of Estonia economist
Photo: Government of the Republic of Estonia
Income Tax
Starting in 2025, personal income tax will increase from 20% to 22%, reducing the net salaries of private individuals. Estonia has long been recognized as a country where reinvested corporate profits were exempt from income tax. However, beginning in 2026, a new 2% tax, dubbed as the “security tax”, will be introduced. Collected by the Social Insurance Board, this tax will apply to all earnings starting from the first euro, including wages, pensions, parental benefits, and other state payments. Furthermore, the 2% tax will also be levied on corporate profits. The government has stated that this is a temporary measure, set to remain in effect until the end of 2028.
So far, profit distributions made by legal entities have been taxed at a rate of 14%. However, starting next year, the lower tax rate will be abolished, meaning that profit distributions made from January onward will be taxed at a rate of 22%. Additionally, the advance income tax rate for credit institutions, which has previously been 14%, will rise to 18% starting next year.
The tax-free income thresholds will remain unchanged in 2025. The progressive income tax system for working-age employees will continue, with the tax-free income amount set at up to 654 euros per month. The government has postponed the elimination of the so-called “tax wedge” until 2026.
VAT
Starting July 1st, the VAT rate will increase by two percentage points to 24%. Additionally, VAT rates that have remained lower until now will also rise – at the beginning of the year, the VAT rate for accommodation services increased from 9% to 13%, and the VAT rate for media outlets will rise from 5% to 9%.
Vehicle tax
The motor vehicle tax, commonly referred to as the “car tax”, came into effect on January 1st. It must be paid for all vehicles registered in the traffic register, with the tax rate depending on several factors. The base amount is 50 euros, and the remaining amount is calculated based on CO2 emissions and the vehicle’s weight. Additionally, there is a requirement to pay a registration fee when a vehicle is registered in Estonia, which also applies to initial registrations. For new cars, the registration fee will be added to the vehicle’s retail price.
The methodology for calculating this tax is quite complex and has led to some quite illogical situations. There have already been cases where the registration fee alone constitutes 50% of the price for some older cars, and in more extreme cases, it can account for as much as 100% of the car’s value. For example, the registration fee for a 15-year-old Toyota Avensis can make up a quarter of its current market value, while for a new hybrid luxury car, it would account for only a few percent of the price.
Since the motor vehicle tax must also be paid for vehicles registered but not used on public roads, this has led to a significant increase in the sale of so-called hobby cars toward the end of last year. Additionally, new car sales in December 2024 were double the number from the same time the previous year.
The general increase in the tax burden also includes the expansion of mandatory traffic insurance requirements. From now on, traffic insurance must cover vehicles that are not typically used in regular traffic but could still be involved in accidents and cause damage. The calculation is based on the vehicle’s maximum speed, as determined by the manufacturer, meaning vehicles like lawnmowers, snowmobiles, electric bicycles, and similar machines could now fall under this requirement.
Land Tax
This year, the maximum land tax rate for residential land will rise from the current 0.5% to 1% of the land’s taxable value. The maximum tax rate for commercial or industrial land will increase from 1% to 2%. Local governments now have greater flexibility in setting land tax rates, and it is expected that most municipalities will raise land taxes to boost their revenue.
There are also discussions about changing the exemption from land tax on residential property, which has been in effect in Estonia so far. According to the present law, landowners or users are exempt from paying land tax for up to 0.15 hectares of residential or agricultural land in densely populated areas, and up to two hectares elsewhere if the building on the land is their registered residence according to the population register. The government now proposes to amend the law so that the decision on land tax exemptions would be made by local municipalities, as the collected land tax goes fully into the local budget. However, the exemption for residential land will remain in place until 2025.
Until now, the annual allowed land tax increase limit has been 10% or five euros. However, under the proposed changes, starting in 2025, these limits will rise to 50% or 20 euros, respectively.
Excise Tax
The excise duty on gasoline, which has remained unchanged for the past seven years, will start increasing by 5% annually over the next four years. This year, the excise duty rate will rise on July 1st, and the combined effect of this change and the VAT increase will result in an additional 6.3 cents per litre.
In addition to the already legislated 5% excise duty increases on alcohol and tobacco products in January 2025 and 2026, the alcohol excise tax was initially set to rise by an additional 5% in July of this year and January of the following year, meaning the excise duty would increase by 10% each year. However, in early December, the Finance Committee unexpectedly reversed its decision, citing the growth in cross-border trade between Estonia and Latvia, and decided that the planned 5% increase in alcohol excise duties for July 2024 would be cancelled. The alcohol excise duty will, however, rise by 10% on January 1, 2026. Starting January 1st, a higher excise duty rate has been applied to all tobacco products, and the tobacco excise duty will increase by an additional 5% on July 1st.
Public Transportation
In 2024, free public transport on local routes was abolished in several counties in Estonia, remaining only in Tallinn for officially registered citizens. In most areas of Estonia, transportation ticket prices also increased, and Elron, the company responsible for passenger train services, adjusted its fares as well. However, statistics show that a significant portion of public transport users still travel for free or at a discounted rate, including pensioners, students, and people with disabilities. According to the current coalition agreement, free travel for the elderly and children will remain in place.
The government has now decided to cut subsidies for bus and train services by six million euros in 2025, with the train operator Elron receiving three million euros less from the state. It is still unclear exactly how much each public transport centre will need to reduce, but both bus line operators and Elron have indicated that price increases, as well as likely reductions in some routes, are unavoidable.
At the beginning of the year, the Ministry of Regional Affairs proposed a plan to increase ticket prices for flights between Tallinn and the Estonian islands. The only exception is the ferry tickets for travel between the mainland and the islands, which will remain the same. However, the conditions for discounted travel on these ferries will change.
Energy
This winter has brought even more volatile prices to the Estonian electricity market, as at the end of last year, a tanker damaged the Estlink 2 power cable at the bottom of the Gulf of Finland, resulting in Estonia losing access to MW of electrical capacity. This is especially true for consumers who purchase electricity based on the market price package. According to current estimates, the restoration of the connection will take at least until the upcoming summer.
Energy specialists believe that the desynchronization of the Estonian electricity grid from the Russian network, scheduled for February, will likely increase rather than decrease energy prices. This is because the Baltic states will have to ensure stable frequency in their grid on their own. Previously, this service was effectively “free”, but now the costs will need to be covered, though it remains unclear where the funding for this will come from. At the end of last year, the distribution network operator Elektrilevi sought to increase network fees, but the Competition Authority did not approve the request, deeming the justification for the fee hikes insufficient.
Volatile energy prices have led to a situation where electricity sellers are reluctant to enter into new long-term fixed-price electricity contracts. As a result, at the end of last year, they were only willing to sign fixed-price contracts with a duration of up to six months.
State Fees
The increase in the minimum wage will also lead to higher fees for several state services, affecting both individuals and legal entities. For example, the Social Insurance Board has announced that the fee for a social services operating license will rise from 32 euros to 100 euros, the state fee for a pharmaceutical production license will increase from 1,000 euros to 2,500 euros, and the state fee for a pharmaceutical wholesale license will go up from 1,000 euros to 2,000 euros.
There was also an increase in the state fees for some everyday services. For example, the state fee for issuing an ID card, which was previously 30 euros, will now cost 45 euros. The fee for marriage registration, which used to be 30 euros, will increase to 70 euros. The cost of a temporary residence permit will nearly quadruple, rising from 64 euros to 225 euros. Starting January 1, fees for issuing a wide range of other documents also went up. The most significant increase affects the expedited processing fees. For instance, obtaining an expedited ID card, travel document, or residence permit card will now cost 250 euros.
In addition, Estonian notaries have raised their concerns, stating that notary fees have remained at the same level for years, while the cost of living has continuously risen. As a result, the current fees for notary services no longer cover the operating costs of notaries, especially those working in rural areas.
In November of the previous year, the Ministry of Justice introduced a draft law stipulating a 32.4% increase in notaries’ income, which would add an additional 11.5 million euros per year from individuals and businesses using notary services. According to the real estate company LVM, this increase in notary fees will make property transactions a few hundred euros more expensive for buyers. Notary services are also required for non-property transactions, such as renouncing an inheritance and other similar matters.
Fines and Penalties
In 2025, the minimum wage in Estonia will be set at 886 euros per month, representing a 6% increase. Since the minimum wage serves as an indicator for calculating the unit rates of fines and penalties, this will also lead to an increase in administrative fines. Additionally, the offense fine unit, which has remained the same for the past two decades, will double from four euros to eight euros. The fines for automatic traffic violations will also rise – previously, drivers paid five euros for each kilometre over the speed limit, but this will increase to seven euros. The maximum amount for an administrative fine will rise from the previous 1,200 euros to 2,400 euros. The maximum allowable warning fine in written warning procedures will increase by nearly 1.4 times, from 300 euros to 420 euros. The maximum penalty in summary procedures will rise to 160 euros.
State Budget Cuts
Estonia’s state budget for 2025 amounts to 17.7 billion euros in revenue and 18.2 billion euros in expenditures. Along with the budget, the 2025–2028 state budget strategy has been approved, which includes a comprehensive plan for reducing state expenditures. Over the next four years, approximately one billion euros must be saved, which will result in cuts affecting nearly all state structures, with reductions primarily ranging from 5% to 10%.
The government has promised to cut public sector spending by 10% over the next three years. The largest financial cuts will impact several state-funded foundations, with some of their activities being either discontinued or significantly reduced in terms of financial support. Critics have argued that the government’s cost-saving plan targets areas with the greatest need for assistance. For example, in the education sector, funding for extracurricular activities and youth language learning, as well as support for research and development, will be cut. The largest reduction in funding has been allocated to the Ministry of Education and Research, followed by the Ministry of Social Affairs, where social benefits will see substantial cuts. Although it is referred as “modernizing” social benefits payments, in practice, it essentially means a reduction in state aid.
Is Anything Getting Cheaper?
Amid all this tax surge, the only major relief factor is the decline in Euribor that began in 2024, which provides relief mainly to Estonians who have purchased homes with loan money. However, since Euribor is also linked to interest rates on other loans, it also affects businesses.
Also, in 2025, the renewable energy fee collected from electricity end consumers to fund renewable electricity support will decrease from 1.05 cents to 0.84 cents per kilowatt-hour. Historically, the renewable energy fee was lower only in 2014, when it was 0.77 cents per kilowatt-hour, announced the transmission system operator Elering.
The increase in the minimum wage by 66 euros (8%) to a level of 886 euros will result in higher wages in both the private and public sectors for jobs tied to the minimum wage. Additionally, the amounts for benefits linked to the minimum wage, such as parental allowance, will rise. The minimum wage increase may also lead to higher local government support and allowances, as well as affect the prices of services offered, such as kindergarten fees, if local governments have linked them to the minimum wage. Since pensions are also indexed, pensions will increase by an average of 5.3% in 2025. The indexing of pensions will take place on April 1.
3,5% – Was the average price increase in Estonia in 2024. In Latvia, the inflation was 1.3%, and in Lithuania 1%.
The Price Increase Will Accelerate Even Further This Year
Liis Elmik, senior economist of Swedbank
In December last year, prices did not change compared to the previous month, with the cost of seven out of 12 commodity groups decreasing. Food and alcohol prices dropped due to sales promotions. Prices for clothing and household goods decreased due to low demand. Transport prices increased after a rise in motor fuel prices, which has been driven by recent geopolitical tensions. Airline ticket prices went up due to higher demand during the school holidays and festive periods.
In summary, prices increased by 3.5% last year. The biggest contributor to the price rise was food, which became 3.2% more expensive over the year. Prices for various services also rose rapidly. Inflation in Estonia remains one of the highest in the European Union. In contrast, price growth in our neighbouring countries has been much more modest. In Latvia, Lithuania, Finland, and Sweden, the price increase last year stayed within the range of 1–2%. Rapid price growth hampers consumption and reduces the competitiveness of exporters.
In 2025, prices in Estonia are expected to rise by nearly 4% according to Swedbank’s forecast. The biggest factors driving this price increase will be food and transport. The purchasing power of the average net salary will slightly decrease. However, the purchasing power of those receiving the average net pension and the minimum wage will increase, although their consumption capacity will remain significantly lower compared to those with average or higher salaries.
GOOD TO KNOW: The cost-cutting obligation for state ministries
The cost-cutting obligation of ministries for the years 2025–2028, in million euros.
- Ministry of Education and Research – 252.7 million euros
- Ministry of Social Affairs – 219.3 million euros
- Ministry of Culture – 86.9 million euros
- Ministry of Rural Affairs – 73.3 million euros
- Ministry of Justice and Digital Affairs – 67.2 million euros
- Ministry of Climate – 64 million euros
- Ministry of Economic Affairs and Communications – 50.7 million euros
- Ministry of the Interior – 27.3 million euros
- Ministry of Defence – 24 million euros
- Ministry of Finance – 23.7 million euros
- Ministry of Foreign Affairs – 22.7 million euros
Source: Government of the Republic of Estonia