The single tax class is adopted

This is a substantial structural reform triggering a real shift in the Luxembourg personal taxation by gradually replacing a system of personal income taxation largely based on marital status, with a model based on current societal realities and the diversity of family structures.

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

The reform applies from 1 January 2028, starting with the 2028 tax year. It gradually replaces tax classes 1, 1a and 2 with a ‘U’ tax class, based on individual taxation.

Taxpayers may retain joint taxation after 2027 for up to 25 years, provided they do not opt for individual taxation (before 1 December 2027 or at any time between 2027 and 2052) and their marital status does not change.

Any application received between 1 December, and 31 December of a tax year can only take effect from the second year following that of the application.

The Bill includes several measures supporting families:

A new early childhood allowance of €5,400 per year for parents of young children under 3 is added to the increase in family allowances applicable from 2027 and complements better care for children via the improved childcare service voucher.
Allowance for children who are not part of the taxpayer's household are revised upward from €5,424 to €5,928.
Single-parent tax credit increase 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, increase from €5,400 to €6,000.

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

The tax deduction of extraordinary charges is facilitated by the adaptation of the progressive rates and the increase of income brackets for that purpose.

Widowed and divorced taxpayers are entitled to joint taxation tariff T for five subsequent years following death of the spouse or the termination of cohabitation instead of three.

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

Finally, the reform provides for a mechanism for automatic indexation of the tax scale after 4 index brackets.

This return will be replaced by a new optional “upon request” assessment regime. This can result, in certain situations, in either a tax refund or additional tax due.

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.

Why it matters

The new personal taxation system is a gamechanger for Luxembourg personal income tax as it simplifies the system, boosts transparency, and provides 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.

Importantly, the Direct Tax Authority is working on a tax calculator, which is due to be made available in January 2027. For couples (married or under a legal partnership) who want to retain the current joint taxation’s personal tax rates, this comparison will be crucial before making decision, that will be irrevocable.

Taxpayers should assess their circumstances and anticipate how they will be taxed now and from the 2028 tax year.

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