Competition among the Baltic states over labour taxes creates a paradoxical picture, in which employers in Lithuania face the lowest labour costs, Latvia pays the most in taxes, yet employees take home the most in Estonia, which has no progressive personal income tax rates.

This picture is shown by a study from law firm Sorainen, which assessed the employer’s total costs at a gross (“on paper”) salary – 3000 euros and 1000 a month, as well as how much money ends up in the employee’s account after all types of tax payments.

“The data show a picture in which, behind the figures, lie a great many small nuances that significantly change both the employer’s costs and the money people actually take home,” says Sorainen partner for tax and customs matters Jānis Taukačs, commenting on the study’s findings and stressing that Lithuania has purposefully worked to reduce the labour tax burden and boost the country’s competitiveness.

“From this angle, competition between countries is a good thing, but playing for ever-greater volume with ever-smaller payments has never been a sustainable strategy, so other mechanisms for competing need to be considered – a simple and maximally automated tax system.”

Hundreds a Month, Tens of Thousands a Year

Data from the Sorainen study show that, at a gross salary of 3000 euros, an employer in Latvia must reckon with costs of 3708.06 euros, in Estonia – 4014 euros, while in Lithuania the cost is only 3053.1 euros. This means that, on average, for each employee earning a gross salary of 3000 euros a month, an employer in Lithuania has costs that are 654.96 euros lower than in Latvia and 960.9 euros lower than in Estonia, which over a year amounts to 7859.52 euros and 11,530.8 euros respectively. If the number of such employees is measured in the tens or hundreds, the annual sum involved can run into the hundreds of thousands of euros.

For Employees, Estonia Is the Better Deal

A different picture emerges from the same study data when viewed from the employee’s perspective. Namely, at a gross salary of 3000 euros, an employee (with no dependants) in Latvia will receive around 2140.58 euros in their bank account, in Estonia – 2456.56 euros, in Lithuania – only 1815 euros.

“It should be borne in mind that, since 2026, the personal income tax non-taxable minimum in Latvia has been fixed at 550 euros regardless of salary level, while in Lithuania the non-taxable minimum for recipients of a 3000-euro gross salary is zero,” explains J. Taukačs. The study’s data show: if a person with a gross salary of 3000 euros could choose where to pay taxes, they would take home 325.58 euros more in Latvia than in Lithuania, while in Estonia – 315.99 euros more than in Latvia.

Latvia Pays the Most in Taxes

From a gross salary of 3000 euros, the Latvian state collects the most in taxes – 1567.49 euros, while the Estonian state treasury gains 1557.44 euros, and Lithuania takes in an even smaller amount – 1238.1 euros. J. Taukačs draws attention to the fact that the Baltic states have seen tax rate increases in recent years. Specifically, in 2024 the lowest personal income tax rate in Latvia was 20%; in 2025 it is 25.5%, i.e. a quarter higher than before; though while the 20% rate applied to income up to 20,004 euros a year, the new rate already applies to income up to 105,300 euros a year (8775 euros a month), while recipients of even higher income must reckon with a 33% rate, up from the previous 31%. In Lithuania, a revision of personal income tax rates took effect on 1 January 2026, as a result of which the 20% rate applies to income up to 82,962 euros (6913.5 euros a month) and the 32% rate to income above 138 270 euros (11,522.5 euros a month), while income between these amounts is taxed at 25%. In Estonia this tax rate has been 22% since 2025, up from the previous 20%. Latvia’s first personal income tax rate – 25.5% – is higher, not to mention the next threshold – the increased rate – of 33%, which kicks in from 105,300 euros a year, plus a further 3% surcharge if income exceeds 200,000 euros. It is precisely this surcharge that is aimed at “taking” more tax money from recipients of large dividend sums and sellers of expensive real estate and other property. At the same time, neither Lithuania nor Estonia has such a surcharge for high earners.

“Why do neither Lithuania nor Estonia have a ‘Frankenstein’ solidarity tax, of the kind introduced in Latvia? Why can Estonia manage without a progressive personal income tax, which neither Latvia nor Lithuania can? Why does Lithuania in essence apply a 20% personal income tax to most salaries, Estonia 22%, and Latvia 25.5%?” asks J. Taukačs.

A Different Order, Everything Else in Its Place

The Sorainen study confirms that, at a gross salary of 1000 euros, an employer in Latvia must reckon with costs of 1236.26 euros, in Estonia – 1338 euros, while in Lithuania the cost is only 1017.7 euros. In turn, from this gross salary the Latvian state collects – 429.24 euros in taxes, while the Estonian state treasury gains 416.48 euros, and the Lithuanian state takes in an even smaller amount – 263.3 euros. An employee (with no dependants) in Latvia will receive 807.03 euros in their bank account, in Estonia – 921.52 euros, while in Lithuania only 754.4 euros.

“In the case of a 1000-euro gross salary, it should be taken into account that the minimum wage in Lithuania is 1153 euros, which means that (just like for an employer in Latvia) for this employee (unless they are also employed elsewhere, or are a pensioner, a person with a disability, a student or a schoolchild) the minimum mandatory state social insurance payment must be paid,” explains J. Taukačs. He points out that, as a result of this requirement, if the gross salary is 1000 euros, the employer will have to pay an additional 29.84 euros, of which – 10.68 euros for health insurance and 19.16 euros for pension and social insurance. “This additional tax payment is not included in the 1000-euro gross salary calculation for Lithuania, because in neither Latvia nor Estonia has the minimum wage yet reached 1000 euros,” explains J. Taukačs.

Caught Up in the Nuances

The data show that even in the small Baltic region, each country has sought its own recipe, and in each of them similar processes are under way that are nevertheless radically different in substance. “In Latvia the second pension pillar is mandatory; in Lithuania and Estonia it is voluntary. If an employee in Lithuania wants to be insured with the state, that will mean an additional 3% of their salary. In Estonia the breakdown is more detailed – 2%, 4% or 6%, which can be chosen. Moreover the default rate is 2%, but an employee can request to raise the contribution to 4% or 6%,” explains J. Taukačs. He agrees that the questions around second-pillar pension systems, and whether to give people the choice to save for themselves, are a separate story, but the mandatory state social insurance system for the self-employed answers clearly – they have a lower rate, but there is no word of anyone conscientiously investing the difference to build up capital.

“The social insurance ceiling in Lithuania is aligned with the 32% personal income tax rate threshold – 11,522.5 euros a month, up to which 12.52% is payable, though the 6.98% health insurance contribution is also payable on salary above this threshold,” says J. Taukačs, pointing out that Lithuania can afford a higher ceiling for mandatory state social insurance contributions (138,270 euros a year), while in Latvia it is lower (105,300 euros a year), and in Estonia there is no such ceiling at all.

“Maybe that affects the distribution of tax rates?” muses J. Taukačs, stressing that the study has only added to the range of questions. “Who are we protecting in Latvia – businesses or residents? If in Estonia the split of mandatory state social insurance contributions falls almost entirely on the employer’s side (which is why the employee keeps more ‘in hand’), maybe it is also time for us to stand up for residents? How can Lithuania manage with such low mandatory state social insurance contribution rates?” J. Taukačs replies when asked to name further questions. He also points out that the calculation examples do not show – how much of the mandatory state social insurance contribution is directed towards health insurance, yet – in Lithuania it is 6.98%, in Estonia – 13%, in Latvia – 1%.

“Competition among countries helps find the best recipe for ensuring economic growth, but not through labour tax rates and nuances as such; since only about 6.5 million people live in the Baltic states, perhaps the time has come to unify these taxes, which would allow potential investors to view the Baltics as a place just as rich in people as Finland.”

Calculation

Employee salary of 3000 euros (gross)

Latvia

Lithuania

Estonia

Gross salary of 3000 euros a month. Taxes paid to the state (euros)

Lithuania        1238.10

Latvia         1567.49

Estonia       1557.44

Payment to employee (net)

Lithuania        1815.00

Latvia         2140.58

Estonia       2456.56

Total employer costs (euros)    

Lithuania        3053.10

Latvia         3708.06

Estonia       4014.00

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Calculation II

Employee salary of 1000 euros (gross)

Latvia

Lithuania

Estonia

Source: Sorainen study

Gross salary of 1000 euros a month. Taxes paid to the state (euros)

Lithuania                  263.30

Latvia                   429.24

Estonia                 416.48

Payment to employee (net), euros

Lithuania        754.40

Latvia         807.03

Estonia       921.52

Total employer costs, euros

Lithuania        1017.7

Latvia         1236.26

Estonia       1338

Source: Sorainen study