There is significant financial gain to be had for both the employer and the employee if the employer contributes to the employee’s pension funds. Since 1 January 2012, companies have been able to contribute to their employees’ pension funds at lower cost and more easily because their contributions into III pillar pension funds are exempt from income tax.
Over the years there is a lot of money to be made from the savings on income tax coupled with the growth in value of the investment.
The employer pension can be an important part of your motivation package, boosting employee earnings and attracting the best staff to your company. This will give you a great advantage in recruitment.
As an employer you have several good reasons for being interested in making contributions to your employees’ pension funds.
- Both parties win financially
Both the employer and the employee will benefit from the contributions to the employee’s pension funds.
Since 2012 employers have been able to contribute to their employees’ III pillar pension funds without having to pay the tax on fringe benefits. The employeer must withhold all taxes from the payment, except for income tax, so the financial saving is considerable. It would cost 20% more to pay the same amount as a salary.
- A great advantage in recruitment
The employer pension can be an important part of your motivation package, boosting employee earnings and attracting the best staff to your company.
- Positive reputation
When competing to recruit the best people, companies that pay the employer pension can get a reputation for being attractive companies and great places to work.
- Savings from income tax
It gives a major boost to your company’s liquidity if funds that would otherwise be paid as income tax can be kept as current assets, which would not be possible if you were paying the tax on fringe benefits and salaries.
- Gain from the growth in value of the investment
On top of the savings on income tax there is a lot of money to be made from growth in the value of the investment.
- Part of the motivation package
Contributions to III pillar pension funds can be successfully incorporated into the motivation package, as the smaller tax bill lets you increase what you pay your staff while keeping costs down.
- Flexible payments
You can make different contributions to III pillar pension for different employees and you can change them when you want. You can make them regularly to a schedule or as one-off payments, depending what you agree with your employees.
The employer can generate the necessary reference number directly using the employee’s securities account number + the corporate registry code + check digits, for example 991000123411212120073.
Check digits can be calculated with the calculator (in Estonian) on the website of the Estonian Banking Association.
Employees need to give their employer their securities account number in advance, or open an account through the bank if they don't have one already.
Once the company’s accountants have collected securities account numbers from all the employees, they can generate check digits for the reference number by using the calculator on the website of the Estonian Banking Association, which also allows multiple reference numbers to be generated.
- The calculator allows up to 100 reference numbers to be generated.
- The calculator that can generate multiple reference numbers can be found on the website of the Estonian Banking Association (in Estonian) under ROHKEM KUI ÜHE VIITENUMBRI GENEREERIMINE.
- To generate multiple reference numbers, you will need a spreadsheet program like Excel to combine the securities account number with your company's registry code and then you will need to enter the string of digits into the calculator on the website of the Estonian Banking Association. The calculator will then generate a reference number with check digits, which you can use as a reference number for payments to the III pillar pension funds of your staff.
- From 1 January 2012 the income tax law in Estonia was changed so that employers could pay in to the III pillar pension funds of their employees or the members of the management or other boards of the company without having to pay income tax, provided that the contributions do not exceed 15% of the payments made to the employee in a calendar year, or 6,000 euros.
- Before calculating how much income tax to withhold, the tax-exempt contributions to the III pillar pension funds are deducted from the total amount paid to the employee, as specified in Article 41.1 of the Income Tax Act.
- The maximum amount that can be paid tax-free is calculated from the start of the calendar year, as specified in Article 42.7 of the Income Tax Act.
- Contributions to the pension funds need to be declared monthly with all other wages and payments. The 15% marginal rate is applied yearly.
- Payments into the III pillar are considered as wages, so before making any payment, the employer subtracts all the taxes and other payments like social security tax, unemployment insurance and mandatory funded pension contributions.
- If the total amount paid into the pension fund is more than 15% of the gross salary or more than 6000 euros, income tax will need to be paid on the excess.
Kalle’s salary is 1,150 euros and from January 2017 his employer starts paying 150 euros of this into Kalle’s III pillar pension funds, as this is within the tax-free limit of 15% of gross wages: 1,150 x 15% = 172.5.
Kalle has tax-free income of 180 euros, is in the mandatory II pillar pension scheme, and is not old enough to get a pension.
- Social security tax 379.50 euros (1,150 x 33% = 379.50)
- Unemployment insurance 18.40 euros (1,150 x 1.6% = 18.40), 2.40 euros of which is withheld from the contribution into the III pillar.
- Employer’s unemployment insurance 9.20 euros (1,150 x 0.8% = 9.20)
- Mandatory funded pension 23 euros (1,150 x 2% = 23), 3 euros of which is withheld from the contribution into the III pillar.
- Tax-free income 180 euros.
- The tax-free contribution to the III pillar is 144.6 euros (the gross sum of 150 – 2.40 - 3 = 1464.6)
- Income tax 156,8 euros (1,150 - 180 – 144.6 – 18.40 - 23 = 784; 810 x 20% = 156,8)
How you use the employer pension depends on the needs and choices of your company and your employees.
To learn more about the Luminor employer pension, please contact your customer manager by calling our corporate customer support on 1773* / +372 6283 300 or emailing email@example.com