Luxembourg Proposes Comprehensive Personal Tax Reform

On January 6, 2026, the Luxembourg government presented Bill 8676, aiming to overhaul the personal income tax system. The proposal seeks to replace the current multi-class system with a single tax class and a unified progressive tax scale, applicable to all taxpayers regardless of their civil or legal status. This reform is part of a broader package that includes measures related to childcare service vouchers, family allowances, and support for single-parent households.

Key Objectives and Policy Context

The reform supports the government's strategic objectives, including boosting citizens' purchasing power, reflecting diverse family structures, and strengthening social cohesion. According to Prime Minister Luc Frieden, the draft measures build on policies implemented since 2023 and are designed to ensure financial stability for households and improve conditions for children and families. Some elements of the package form part of the broader national action plan for the prevention and fight against poverty, first outlined by the government on December 9, 2025.

Key Measures and Impacts of the Reform

The government's proposed reform aims to simplify the personal income tax system, enhance financial predictability, and strengthen support for families.

Key measures applicable as from tax year 2028:

• Single Tax Class: All taxpayers, including new entrants and those currently in Classes 1 and ia, would be subject to a unified tax class (Tariff U). This eliminates tax class changes and ensures tax stability even when family circumstances change.
• No Losers: Taxpayers currently benefiting from Class 2 rates would retain them for a transitional period of 25 years (Tariff T), with extended protection in the event of death or divorce (increased from 3 to 5 years). They would have the possibility to irrevocably opt out of the joint taxation, either by a joint election before November 30, 2027 (to be taxed individually as from January 1, 2028), or before November 30 of any subsequent year prior to 2052 (to be taxed individually from the year following the opt-out).
• Increased Tax-Free Allowance: The exempt bracket would be doubled from €13,230 to €26,650, significantly reducing the average tax burden and increasing household available income. The number of income brackets would be reduced from 22 to 10, impacting the progression of the overall tax schedule.
• Immediate Benefits: According to the government's statement, those in Class 1 and Class ia (for example, young taxpayers or civil partners not opting for Class 2), and approximately 85% of Class 2 would benefit from immediate tax relief.

The Bill includes several measures supporting families:

• New early childhood allowance of €5,400 per child under 3.
• Allowance for children who are not part of the taxpayer's household would be revised upward from €5,424 to €5,928.
• Single-parent tax credit increased from €3,504 to €4,008.
• Flat-rate allowance for domestic expenses, aid and care costs due to dependency as well as for childcare costs would increase from €5,400 to €6,000.

The tax scale would be periodically adjusted to prevent hidden tax increases caused by inflation (“Kalte Progression”), ensuring long-term predictability.

• Deductible ceiling for private loan interest, insurance premiums, and similar special expenses increased from €672 to €900 per member of the tax household.
• Deductible amount for home savings contracts raised from €1,344 to €1,500 for subscribers aged 18–40, and to €900 for others; the ceiling would apply per member of the tax household.

This return will be replaced by a new optional assessment regime.

Impact

The reform is designed to provide predictable and stable tax rates, boost household purchasing power, and deliver targeted support to parents and single-parent families.

Reform of the Childcare Service Voucher (CSA)

While releasing the Bill, the government announced a reform of the childcare service voucher system to strengthen access to education and care services (crèches, drop-in centers, school hostels, and parental assistants). This reform is designed to make childcare more affordable, improve quality, and combat child poverty. The effective date of these measures has not yet been communicated.

• Flexible Billing: Fees will be based on actual registration hours rather than fixed hours, allowing parents to adjust care monthly.
• Targeted Support: Families earning up to 3.5 times the social minimum wage will receive additional relief; children aged 1–4 cared for by parental assistants get 20 hours of free weekly care.
• Significant Savings: Total estimated savings for households: €79 million per year, funded via state compensation to care providers. Households may save up to several thousand euros per year depending on income and childcare needs.
• Guaranteed Access & Quality: By 2030, every child in need would have a place in a childcare service. Investments would improve service quality, while new governance rules increase transparency and accountability.

Impact

Parents will gain financial relief and flexibility, children benefit from high-quality early care, and equal opportunities are strengthened.

Strengthening Family Support

The government is also reinforcing family support to complement the tax and childcare reforms, ensuring children’s needs are met regardless of household income.

• Family Allowances: Structural increase of €45 for children under 12, and €60 for children over 12.
• Targeted Assistance: Low-income households with school-going children can receive up to €3,000 per child per year.
• Back-to-School Allowance: Increased by €60 for children aged 6–11, and €90 for those over 12.
• Birth Grants: Introduction of a àth tranche; all allowances are automatically indexed to maintain value over time.

Impact

Families will receive more predictable and substantial support, reducing child poverty and ensuring children grow up in stable and secure conditions.

Why It Matters

The new reform is a game-changer for Luxembourg personal income tax as it will simplify the system, boost transparency, and provide households with predictable, stable tax rates. Most taxpayers will benefit from these advantages, particularly young people starting their professional lives, families, and single-parent households, while fairness is maintained through transitional arrangements.

Special attention will need to be given to Luxembourg non-resident taxpayers who currently benefit from tax Class 2 and who are set to acquire Luxembourg tax residency in 2028, as it remains uncertain whether they will be able to retain Class 2 status.

Individuals who enter a legal partnership by the end of 2026, or those who marry or acquire Luxembourg tax residency by the end of November 2027, are advised to consider the potential effects of these decisions on their future personal taxation.

At KPMG, we are happy to help you navigate these changes, unlock available tax relief, and plan confidently for the future.