Compensation planning and tax system differences in the Baltics

2/12/2025

Three countries, three tax systems

• In Estonia, a net salary of 2 000€ gives a gross salary of 2 593€ and an employer cost of 3 470€. The Estonian system is simple: the gross salary does not include social tax, which is added separately and paid by the employer.
  
  
• In Latvia, for the same net salary, the gross salary is 2 842€ and the cost to the employer is 3 513€. Here, too, the social tax paid by the employer is not included in the employee's gross salary.
  
  
• In Lithuania, however, a net salary of 2 000€ translates into a gross salary of 3 306€, as it includes social tax, which is paid by the employee and not the employer. The total cost to the employer is 3 364€.

The Lithuanian system, where social tax is added to the gross salary of the employee, makes the Lithuanian gross salary seem higher. At the same time, the total cost to the employer remains lower than in its neighbouring countries.

What to take into account when planning salary costs?

1. Total cost is crucial: When planning salaries, it is important to focus on the total cost to the employer, not just the gross wage figure. This is particularly important for multinational companies comparing labour costs in different countries.
   
2. The impact of the tax structure on employee motivation: Although the gross wage in Lithuania seems high, the amount available to the employee is lower. Salary demands may therefore be higher, as employees tend to base their wage demands on net income.
3. Cross-country salary comparisons: In the Baltics, companies often compete for the same professionals. In this context, it is important to make conscious comparisons between equivalent jobs and to adapt remuneration systems to the specificities of the market and the tax system.

Learning from the Nordic experience

As in the Nordic countries, the Baltic states could place greater emphasis on transparency in pay systems and cost structures. Many organisations have already formulated pay policies. Pay transparency, in line with the forthcoming EU Pay Transparency Directive, will increase labour mobility and reduce the pay gap between countries. At the same time, it will require more data collection and analysis from employers to make fair pay the norm.

Rather than relying on gross and net figures alone, it is important to understand the national tax system, the total cost to the employer and the expectations of employees. In this way, we lay the foundations for a fair and competitive pay system that supports the economic sustainability of both organisations and countries.

Cooperation, clarity and awareness are the keys to finding a balance in the Baltic labour market.