Luxembourg tax reform: Draft Bill No. 8678 – Introduction of a single tax class from 2028

From the 2028 tax year, the current tax class system would be replaced by a single tax class based on mandatory individual taxation, accompanied by extensive transitional arrangements, especially for existing married couples and registered partners.

Objectives

The reform marks a fundamental shift in Luxembourg’s approach to personal income taxation. Its key objectives are to:

• ensure tax neutrality regardless of civil or family status;
• enhance fairness, transparency, and predictability;
• align taxation with evolving societal and family structures;
• strengthen individual financial autonomy; and
• increase purchasing power, particularly for low- and middle-income households.

Overall, the reform replaces household based taxation as the default with individual taxation as the core principle.

Single tax class and unified tax scale

As from 1 January 2028, tax classes 1, 1a and 2 – currently applicable respectively to single taxpayers, single parents/widowers and certain pensioners, and married couples or registered partners under collective taxation – would be abolished and replaced by one single tax class, applying a unified progressive tax scale largely inspired by the current class 1a rates.

Key features

• Mandatory individual taxation for taxpayers currently in classes 1 and 1a, as well as for couples marrying or entering into a registered partnership after the reform enters into force.
• Separate taxation of each spouse or partner, based solely on personal income.
• Abolition of joint and several tax liability within couples.
• Doubling of the tax free income bracket to EUR 26,650.
• Fewer tax brackets with an adjusted progressive structure.

The reform is expected to be particularly beneficial for former class 1 taxpayers, broadly neutral for class 1a taxpayers, and more situation dependent for those currently taxed under class 2.

Transitional regime for existing couples

To mitigate potential adverse effects for households relying on joint taxation, the draft law introduces an exceptionally long transitional period of 25 years, lasting until the 2052 tax year.

Scope and mechanics

• Couples married or partnered before 1 January 2028 may retain collective taxation under a transitional scale broadly reflecting current class 2
• These couples may opt at any time for individual taxation under the new single tax class.
• The choice is irrevocable once exercised.
• In cases of death or divorce, the transitional tax treatment would continue for five years, instead of three under current rules.

Government simulations indicate that individual taxation is generally favourable when the lower earning spouse contributes at least 25% of total household income, while highly unbalanced income situations may justify remaining in the transitional regime.

Accompanying measures

The reform is supported by several additional measures to harmonise benefits and enhance family support, including:

• An early childhood allowance of EUR 5,400 per year per child under the age of three.
• An increase in the single parent tax credit to EUR 4,008.
• Continued recognition of children in the individual tax system, generally allocating child related tax benefits 50/50 between parents (100% for single parents).
• Higher deduction limits, with the annual ceiling for interest and insurance premiums increased from EUR 672 to EUR 900, housing savings deductions raised to EUR 1,500 for taxpayers aged 18–40 (and to EUR 900 for other taxpayers), and the lump sum deduction for domestic help, care and childcare expenses increased from EUR 5,400 to EUR 6,000.
• Abolition of the simplified annual tax adjustment (décompte annuel), replaced by taxation by assessment upon request.
• A mechanism requiring periodic adjustments of tax brackets and rates to reflect inflation following wage indexation.

Timeline and next steps

• Planned entry into force: 2028 tax year.
• Legislative process: expected to continue throughout 2026.
• An online tax simulator is planned for 2027 to help taxpayers – particularly couples – assess the most appropriate tax regime.

Conclusion

Draft Bill No. 8676 represents a major structural reform of Luxembourg’s personal income tax system, shifting decisively toward individual-based taxation while safeguarding existing situations through a lengthy transitional period. Taxpayers, especially couples, will need to assess their personal circumstances carefully to determine the most suitable regime once the reform takes effect.

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