Statutory Pensions are Taxable Earnings

The taxation of statutory pensions is basically the same as the taxation of other earnings. However, the following are tax-exempt:

  • the child increase of the national pension
  • a pensioner’s basic-rate care allowance
  • front veterans’ supplements, veterans’ supplements, and pensioners’ housing allowance.

The taxation and contribution burden of pensions differ from those of wages due to different tax deductions and social insurance contributions. A pension income deduction in both the municipal and the state taxation is granted on pension income.

No unemployment insurance or earnings-related pension contribution is deducted from the pension income. A government medical treatment charge is deducted from pension income, but not the medical care insurance contribution.

Table. Full amount of pension income deduction and the annual income level as of which the pension recipient starts to pay tax, as well as the annual income level as of which no deduction is granted (in 2017).

Full deduction

Pension, tax becomes payable

Pension, no deduction

 Municipal taxation

 9 040

 11 067

 26 766

 National Taxation

11 860

 24 107

43 071

Within the lower income brackets, the pensioner’s take-home income is higher than for wage earners at the same income level. Within the higher income brackets, the taxation evens out.

In the higher income brackets, the total contribution burden of pension income is more-or less on the same level with the wage-earner’s tax and contribution rate level, in which the wage-earner’s earnings-related pension (over 53-year-olds) and unemployment insurance contributions have been taken into account.

The rules for how additional tax is determined on pension income was changed in 2017. The income limit was raised from 45,000 euros to 47,000 euros. The tax rate was reduced from 6 per cent to 5.85 per cent.

Pensioner’s and wage earners’s taxation and contributions in 2017, % of gross income

Structure of pensioner’s taxes and contributions in 2017, % of gross income 

The earnings from work of a pension recipient is taxed as any other earned income. Other earned income reduces the pension income deduction: when the deduction decreases, the tax rate increases. On the other hand, the earnings deduction and the deduction for the cost of acquiring an income is made to the actual wage income.

No unemployment insurance contribution is deducted from the wages of a person who has turned 65. The pension contribution is paid until the age when the insurance obligation ends, determined separately for each age cohort. No health insurance contribution is deducted from the wage of persons who have turned 68.