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An employer is associated with the funded pension through its employee, from whose gross salary the employer has to withhold 2%. 4%* that will be added by the state, will be withheld by the Tax Board, and that is something that the employer does not have to worry about.

Everyone who is making payments taxable with social tax, i.e. all employers operating in Estonia are obliged to withhold the mandatory funded pension contributions.

The mandatory funded pension contributions must be withheld from the payments made to the persons who have joined the funded pension system and who were born after 1 January 1983.

NB! The right and obligation to pay the payment arises on 1 January of the year following the year when a young person becomes 18 years old.

In order to avoid problems, an employer is required to check whether their employees have joined the pension system. Otherwise tax arrears may occur and the employee’s mandatory funded pension contributions are not received in the pension fund in due time. The status of the employees can be checked by the employer through:

Employers are obliged to declare the mandatory funded pension contributions to the Tax Board.
A tax return on the withheld contribution must be submitted by the 10th date of the following month, and by the same date, the contribution must be transferred to the bank account of the Tax Board. The contributions are governed by the provisions of the Taxation Act, i.e. the Tax Board manages the contributions similarly to state taxes.

The withholding agent is obliged issue a certificate regarding the withheld contributions to a person, to whom the amounts constituting the object of the contribution were paid, at the request of such person by 1 February of the year following the respective calendar year. If a person leaves employment, the certificate must be given to him or her together with the final settlement.

The contribution is withheld on:

  • the salaries paid and other payments in money made to an employee,
  • the salaries paid and other payments made to a member of the Riigikogu, a member of the Government of the Republic and a public servant,
  • the payments made to a person of a management or control body of a legal person,
  • the payments made to a natural person on the basis of a contracting agreement, authorisation agreement or other contract under the law of obligations, concluded for provision of a service, save the payments made to a registered natural person on the basis of law.

P.S. Whereas generally the Tax Board does not require payment of social tax on passive income, including rent, such passive income should also not be the object of contributions to the funded pension.

Contributions are not withheld on:

  • fringe benefits,
  • monetary payments made to an employee, which do not constitute the object of the social tax (compensation for business trip expenses and daily allowances, compensation for use of a personal car, amounts paid to residents of foreign states by a resident of Estonia through a permanent establishment that is located abroad).

The payments from the funded pension started in 2009. With that started the termination of contributions to the funded pension.

The obligation to make the contributions ends as at the end of the year, on 31 December following the day of first redemption of the units of the pension fund.

If the payments to an employee who has reached pension age start in the middle of the year, but he or she continues working, then in the salary calculation, the second pillar contributions must be withheld from his or her salary payments made until 31 December.

The employer’s obligation to calculate his employee’s funded pension contributions ends as on 31 December.

Information on when to terminate the funded pension contributions in the salary calculation of employees can be checked since 2009 through the Pension Centre by using the personal identity code simple query at www.pensionikeskus.ee. To check information on a larger group of employees, a mass query can be ordered.

Background

It is a very widespread understanding that if an older employee reaches the age of retirement pension and the unemployment insurance contributions no longer have to be calculated for him or her, the calculation of the funded pension contributions could also be terminated. In reality it is not the case and calculation continues also for the employees who are older than the retirement pension age.

The decision to arrange termination of payments to take place once a year was made based on the experience of the Tax Board as well as the Pension Centre from the time when the contributions started and the new system caused a lot of confusion. In many cases, salaries had to be recalculated and new declarations had to be filled in. If the calculation of contributions is ended once a year, it is much easier for the accountant to check and preparations for the new year can star already during the previous year.

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