Key takeaways
On 6 January 2026, the Luxembourg Government has issued a major tax reform draft law (the “Draft Law”) introducing a single personal income tax class ("classe d'impôt unique") shifting the present tax system to individual taxation as the default-regime and which will be running over a 25-year transition for pre-reform married and partnered taxpayers.
Rationale of the Draft Law
As of today, Luxembourg’s personal individual income tax (“PIT”) system is based on several tax classes: tax class 1 applies to single taxpayers, tax class 1a to single parents and certain elderly taxpayers and tax class 2 to married couples or registered partners, who are taxed under the “splitting method”, whereby their combined income is equally divided between the spouses for tax calculation purposes, mitigating the effects of progressive taxation.
In accordance with the Draft Law’s terms, Luxembourg plans on abolishing the current three tax classes (Classes 1, 1a, and 2) and replacing them with a single, universal tax class (“Tax Class U”) starting in January 2028. This reform aims to make the system neutral with respect to marital status (treating singles and couples the same), simplify taxation, and generally lower tax for many singles, families, and pensioners by introducing a single progressive scale with a higher basic tax-free allowance. Moving to individual taxation reduces the high marginal burden on second earners and ends joint liability for spouses.
Main structural changes
From tax year 2028, all taxpayers, including those marrying or registering a partnership on or after 1 January 2028, are taxed individually under a new single tax class i.e., Tax Class U in accordance with the reformed provisions of Article 118 of the Luxembourg Income Tax Law ("LITL"). Pre-2028 married couples who meet conditions, and pre-2028 registered partners on joint request, may remain collectively taxed during a transition that ends after tax year 2052. Therefore, they will be taxed under a separate transitional tax class in accordance with the upcoming codification of Article 118bis LITL ("Tarif T"), which mirrors the former tax class 2 splitting method and is explicitly time-limited. At any time, pre-2028 married couples and partners can irrevocably opt into individual taxation under the Tax Class U. Once taxpayers switch, no return to collective taxation is possible.
Entry into force is generally from tax year 2028. A one-off 2027 window lets existing married/partnered taxpayers pre-elect individual taxation for 2028 payroll. The option is irrevocable.
Tax effects of the Tax Class U
Tax Class U provides a widened zero band up to € 26,650 and fewer brackets; top marginal rates remain 39-42% at higher bands. Illustrations show tax in class 1 today falls under the new tariff across incomes; class 1a taxpayers also see slight reductions. Overall, the Tax Class U is more favourable than current class 1, similar or slightly better than class 1a, and can be advantageous for many couples when both partners contribute at least approximately 25% of household income; asymmetric one-earner couples benefit less from the Tax Class U as the splitting method is at their real advantage.
Transitional collective taxation (Tarif T)
Pre-2028 married couples and partners taxed collectively apply Article 118bis LITL through 2052; examples show continuity with today's class 2 burden. Widowed and divorced taxpayers keep Tarif T for five years post-event (up from three) before moving to the single class, unless they opt earlier for individual taxation.
For non-residents, alignment of WHT and assimilation rules ensures pre-2028 married cross-border couples can remain collectively taxed during transition if assimilation criteria are met, with one-time tolerance for an exceptional year of non-professional foreign income.
Children and family measures reshuffled for PIT purposes
Child recognition rules are modernised: where both parents live with the child, the child-based fiscal benefits are deemed granted to both, regardless of which parent receives family allowances, and associated caps or uplifts are split 50/50; a lone parent gets 100%. These principles are implemented in revised Article 122 LITL.
Article 123 LITL is aligned to define children and household membership, including shared residence cases; pre-2028 cross-border spouses under collective taxation retain recognition for the non-resident spouse's children during transition. Article 123bis LITL (i.e., post-child "bonus") is adapted to the new shared/sole entitlement logic; the standard amount remains €922.50, subject to an income cap.
New "early childhood allowance" (abattement petite enfance) in Article 129h LITL: new tax provisions foresee a tax allowance of €5,400 per child under 3 at year-start for taxpayers under Tax Class U - the allowance amount is (i) split 50/50 where both parents cohabit; or 100% attributed to a sole parent; with an option to reallocate the other half to one spouse if the other has under €15,000 gross resources, upon request and via assessment.
Single-parent tax credit (CIM) is increased to €4,008 up to €60,000 of adjusted taxable income, then tapers to €750 by €105,000; the allowable child-benefit offset threshold is also raised.
Other targeted deductions and thresholds
Special expenses caps increased: general insurance/interest/certain contribution cap rises from €672 to €900, with proportional child/conjoint uplifts aligned to the new child-recognition logic and transition rules. Home-savings contract (within the scope of the existing Article 111 LITL) caps increase to €1,500 (age 18-40) and €900 otherwise, with updated uplift rules.
New tax deduction on pensions: voluntary pension (continued or optional) contributions paid by a taxpayer for the spouse/partner (when taxed individually under Tax Class U) are deductible by the paying taxpayer, to support career breaks (e.g., childcare) and long-term pension adequacy.
Charges extraordinaires thresholds are re-based: maximum abatement for children outside the household rises from €5,424 to €5,928.
Certain capital gain allowances and business expense rules are expressly tied to the 2028-2052 transition for jointly taxed couples. The short-term capital gain allowance on movable property is doubled to €100,000 only for spouses taxed collectively under Tarif T during the transition; outside that regime, the standard €50,000 applies. On the business expense side, remuneration paid to a spouse and related-party rents are non-deductible only where the spouse is jointly taxed with the proprietor, and only until 2052.
Withholding tax, assessment, and simplification
Withholding tax (“WHT”) progressive tax scales switch from historical class-based to tariff-based labelling respectively: "Tax Class U" (Article 118 LITL) or "Tarif T" (Article 118bis LITL) as applicable; timing rules for change requests are set (30 November cut-off for next-year effect). Additionally, filing of annual WHT adjustment on salaries known as "décompte annuel" is abolished. Instead, a new "assessment on request" regime (Articles 153bis and 153ter LITL) allows residents - and in parallel, non‑residents under new Article 157(4a) LITL - to regularise WHT or claim benefits where not assessed de lege (i.e., non-imposés obligatoirement par voie d’assiette); protective rules prevent disadvantage from an elective assessment except defined cases. Child credits and the enhanced single-parent credit can be imputed via assessment if not fully granted at source. WHT treatment of non-periodic income (e.g., extraordinary payments) is updated to reference the new tariffs.
Non-resident (cross-border) specifics
A new elective assessment route in Article 157(4a) LITL allows for non-residents who do not meet mandatory assessment criteria regularise salary/pension WHT and claim benefits, with safeguards mirroring residents' regime and an income-composition rule for rate determination where appropriate. Article 157bis LITL is rewritten to apply the Tax Class U: non-resident professionals’ default to Tax Class U; only certain pre-2028 married cases under assimilation apply T Tarif during transition, tied to eligibility for collective taxation. Article 157ter (assimilation) is restructured: for pre-2028 married non-residents fulfilling the 90% Luxembourg sourced income /€13k thresholds, collective taxation applies by default during the transition unless they irrevocably opt for individual; a one-year carve-out addresses the year after relocating from residency; a single exceptional year tolerance covers non-professional foreign income.
Timing and Next Steps
The Government approved the Draft Law’s for filing and is currently pending Council of State’s opinion. General application is from tax year 2028. Existing married/partnered taxpayers who want individual taxation reflected on 2028 payroll must file the joint request by 30 November 2027 (irrevocable).
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