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How to determine your tax class in Luxembourg
If you are a resident of Luxembourg or planning to move to the country, to manage your finances you will need to understand your tax class. Luxembourg has a unique tax system with different tax classes, each with its own set of rules and rates. Determining your tax class correctly is crucial, as it can have a significant impact on the amount of tax you pay and affect your eligibility for the tax benefits to which you are entitled.
In this article, we will cover the different classes and criteria to determine your tax class in Luxembourg. Whether you are an employee, self-employed, or a business owner, understanding your tax class will help you to make informed decisions about your finances and ensure that you comply with local tax laws.
Distinctive features of tax classes
The tax classes in Luxembourg are assigned based on your family situation and income. The tax administration will automatically assign you to a tax class based on the information you provide when you register with the local authorities. They will look at your income, marital status, the number of children you have, and your age (if you are older than 64 years old).
Currently, there are three tax classes in Luxembourg — 1, 1A, and 2:
- Tax class 1
Includes single individuals, married taxpayers who have chosen to be taxed separately, and certain married non-resident taxpayers.
- Tax class 1A
Includes single parents with a dependent child, individuals aged 65 years old and older, and may also include people with specific personal situations.
- Tax class 2
Includes married taxpayers, widowed taxpayers (for the first three years after the death of their spouse), divorced or separated individuals (for the first three years after divorce), civil partners, and certain married non-resident taxpayers.
Your tax class is determined by your personal and marital status on January 1 of each fiscal year. If your situation changes during the tax year, the class may be adjusted accordingly. For example, if you get married, you have a child, or your income changes significantly, you may be re-assigned to a different tax class.
Determining your tax class in Luxembourg
So far tax class system seems quite simple, however, there are many details to consider, such as marriages between residents and non-residents and the effect of tax assimilation.
The following chart shows a more detailed panorama for the class determination considering the differences between residents (marked as R) and non-residents (marked as NR), and the effect of the tax assimilation (marked as TA).
Tax assimilation refers to the possibility for non-residents to be treated as tax residents if at least 90% of their total worldwide income is taxed in Luxembourg.
| Without children | With children | > 64 years old | ||
|---|---|---|---|---|
| Single | 1 | 1A | 1A | |
| Married | R + R or NR with TA | 2 | 2 | 2 |
| Married | R + NR without TA | 1 | 1A | 1A |
| Married | NR + NR | 1 | 1 | 1 |
| Partnered | < 1 year | 1 | 1A | 1A |
| Partnered | > 1 year | 2 | 2 | 2 |
| Divorced/ separated | < 3 years | 2 | 2 | 2 |
| Divorced/ separated | > 3 years | 1 | 1A | 1A |
| Widowed | < 3 years | 2 | 2 | 2 |
| Widowed | > 3 years | 1A | 1A | 1A |
* When living in a common residence all year long, filing a joint tax return, and with tax assimilation when either one or both are nonresidents.
You can see a more detailed version on the Luxembourg tax administration website. Make sure to pay attention to differences if you are taxed as married non-residents for tax years prior to 2017 and for the tax year of 2017: you will be allocated different tax classes, than usual, depending on the situation, i.e. the percentage of the professional income of the household and family circumstances.
If you are unsure about your tax class or if you think you may be eligible for a different tax class, you should consult with a tax professional or contact the Luxembourg tax administration to get more information or request a class change.
Contacts for Luxembourg tax administration for individuals are divided by communes: find your local tax office on the official website.
The current system has worked this way for quite some time and, according to experts and citizens, it has one big problem: it penalizes single people enormously. For this reason, there has recently been a petition to review the tax classes that have piled up 5,500 signatures, which is more than the 4,500 signatures needed for a debate in the Chamber of Deputies.
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Taxation of different classes
The amount of taxes to pay is based on a progressive income tax system, which means that the more you earn, the higher the percentage you will pay in taxes. However, your taxes are not calculated directly on your income, this is where the classes come into play. They serve to determine the value on which your taxes will be calculated according to your class and your income.
Once you have determined the base on which your taxes will be calculated, you can calculate the value of your taxes using the tax progressive rates:
| From EUR | To EUR | Tax rate (%) | Employment fund surcharge (%) | Effective tax rate (%) |
|---|---|---|---|---|
| 0 | 11,265 | 0 | 7 | 0 |
| 11,266 | 13,137 | 8 | 7 | 8.56 |
| 13,138 | 15,009 | 9 | 7 | 9.63 |
| 15,010 | 16,881 | 10 | 7 | 10.70 |
| 16,882 | 18,753 | 11 | 7 | 11.77 |
| 18,754 | 20,625 | 12 | 7 | 12.84 |
| 20,626 | 22,569 | 14 | 7 | 14.98 |
| 22,570 | 24,513 | 16 | 7 | 17.12 |
| 24,514 | 26,457 | 18 | 7 | 19.26 |
| 26,458 | 28,401 | 20 | 7 | 21.40 |
| 28,402 | 30,345 | 22 | 7 | 23.54 |
| 30,346 | 32,289 | 24 | 7 | 25.68 |
| 32,290 | 34,233 | 26 | 7 | 27.82 |
| 34,234 | 36,177 | 28 | 7 | 29.96 |
| 36,178 | 38,121 | 30 | 7 | 32.10 |
| 38,122 | 40,065 | 32 | 7 | 34.24 |
| 40,066 | 42,009 | 34 | 7 | 36.38 |
| 42,010 | 43,953 | 36 | 7 | 38.52 |
| 43,954 | 45,897 | 38 | 7 | 40.66 |
| 45,898 | 100,002 | 39 | 7 | 41.73 |
| 100,003 | 150,000 | 40 | 7 | 42.80 |
| 150,001 | 200,004 | 41 | 9 | 44.69 |
| Over 200,005 | 42 | 9 | 45.78 |
To use that table, you must consider that the tax is calculated progressively. This means that if for example, you have an annual income of 14,000 euros, although the percentage that corresponds according to the table is 9%, this percentage is not applied to the totality of the 14,000 euros but is applied only to the range of income that falls in this level.
To make things easier, the administration has a page that allows you to automatically calculate taxes based on a given income.
It is still important to understand how the calculation process works. In the following sections, we will show examples of how the calculation is performed for each of the classes but it's worth noting two points about the calculations in our examples:
- The calculation made by the government page
Differs by a few cents because the actual calculation is slightly different. We calculate the tax using the effective tax rate to simplify the explanations, but on the government calculation, the tax rate and the employment fund surcharge are calculated separately and rounded down before they form the total tax. The calculation presented here allows us to understand the concept and only differs by a few cents.
- This calculation only considers the basic income tax
It does not include any other deductions, exemptions, or credits that might apply to an individual's tax situation.
Tax class in Luxembourg only affects the calculation of income tax. Other taxes, such as value-added tax (VAT) and property tax do not depend on the tax class of the individual.
Class 1 tax amount
With this class, the tax rate applies to your entire income.
For example, if your annual income is 20,000 euros and you have class 1, your taxes will be calculated based on your entire income as follows:
- 0% on the first 11,265 euros
- 8.56% on the next 1,872 euros (11,265 – 13,137)
- 9.63% on the next 1,872 euros (13,137 – 15,009)
- 10.70% on the next 1,872 euros (15,009 – 16,881)
- 11.77% on the next 1,872 euros (16,881 – 18,753)
- 12,84% on the next 1,247 euros (18,753 – 20,000)
To calculate the tax due on each amount, we multiply it by the corresponding tax rate:
- 1,872 euros x 8.56% = 160.24 euros
- 1,872 euros x 9.63% = 180.27 euros
- 1,872 euros x 10.70% = 200.30 euros
- 1,872 euros x 11.77% = 220.33 euros
- 1,247 euros x 12.84% = 160.11 euros
So, the total due will be 160.24 + 180.27 + 200.30 + 220.33 + 160.11 = 921.27 euros
Class 1A tax amount
If you earn more than 45,000 euros per year you will be taxed on your entire net salary, but your annual income will be reduced by half of the difference between your actual annual income and the 45,000 euros threshold.
For example, let's say you make 40,000 euros a year. The difference between 40,000 and 45,000 is 5,000 euros. Half of that is 2,500 euros. So, your net salary will be reduced by 2,500 euros.
This new amount (37,500 euros) will be used to determine your taxes as follows:
| Bracket | Tax rate (%) | Amount taxed (euros) | Tax (euros) |
|---|---|---|---|
| 0 - 11,265 | 0.00% | 11,265 | - |
| 11,266 - 13,137 | 8.56% | 1,872 | 160.24 |
| 13,138 - 15,009 | 9.63% | 1,872 | 180.27 |
| 15,010 - 16,881 | 10.70% | 1,872 | 200.30 |
| 16,882 - 18,753 | 11.77% | 1,872 | 220.33 |
| 18,754 - 20,625 | 12.84% | 1,872 | 240.36 |
| 20,626 - 22,569 | 14.98% | 1,944 | 291.21 |
| 22,570 - 24,513 | 17.12% | 1,944 | 332.81 |
| 24,514 - 26,457 | 19.26% | 1,944 | 374.41 |
| 26,458 - 28,401 | 21.40% | 1,944 | 416.02 |
| 28,402 - 30,345 | 23.54% | 1,944 | 457.62 |
| 30,346 - 32,289 | 25.68% | 1,944 | 499.22 |
| 32,290 - 34,233 | 27.82% | 1,944 | 540.82 |
| 34,234 - 36,177 | 29.96% | 1,944 | 582.42 |
| 36,178 - 37,500 | 32.10% | 1,323 | 424.68 |
| Tax total | 4,920.74 euros |
Class 2 tax amount
Taxes for this class are based on half the combined household income, and the amount is multiplied by 2 at the end.
For example, let's say a married couple has a combined taxable income of 60,000 euros. Since they are in Class 2, their taxable income will be divided by two, which gives us 30,000 euros.
According to the tax rates, the tax for this income level is 2,792 euros. Then you have to multiply this number by 2 to have the final tax amount — 5,584 euros.
PACS and tax classes in Luxembourg
A domestic partnership or PACS (Civil Solidarity Pact) is a legal recognition of domestic arrangements between two people who have chosen to live together without getting married. This partnership provides legal security in civil matters, tax matters, and social security.
The PACS is a civil contract that can be entered into by two people of different or the same sex who live together and declare their official partnership before the civil registrar. Once the PACS is registered, partners benefit from tax deductions and social protection, as well as rules of solidarity and responsibility between partners.
Tax implications of the PACS
When it comes to tax implications for civil partners in Luxembourg, there are two options: joint or separate taxation. Partners can file the joint Form 100 income tax return but only if the PACS has existed for the entire tax year and they have shared a common home or residence for the same period.
- Joint taxation
This will bring a reduction in the overall tax burden. Especially when one partner has little or no income. Whit joint taxation, the couple is treated the same as married couples for tax purposes and is taxed jointly in tax class 2 on all their combined income.
They are also eligible for double the tax relief available for certain types of expenses, such as interest on personal loans, insurance premiums and contributions, private pension plan contributions, and payments into a home purchase saving account. In addition, under certain circumstances, they may also be eligible for a tax allowance known as the extra-professional allowance.
However, civil partners are precluded from joint monthly taxation at source and their tax cards are not affected by their partnership, they are only taxed jointly after the year has ended and at their request. To make a request you need to fill out the Form 100 income tax return.
- Separate taxation
With this formality each partner will be liable for taxation based on their individual incomes and there will not be any special benefits for the couple on the fiscal side. Both partners will determine their tax class separately and will not benefit from PACS.
It is important to note that the tax implications of a civil partnership in Luxembourg can be complex and vary depending on individual circumstances. If you are considering entering into a PACS it is important to understand the legal implications and consult with a professional to determine the best course of action for your situation.
Frequently Asked Questions (FAQ)
What are the different tax classes in Luxembourg
Three tax classes in Luxembourg determine the amount of tax you will pay: tax class 1, tax class 1a, and tax class 2.
- Tax class 1 applies to single individuals or married taxpayers who have opted for separate taxation.
- Tax class 1a applies to people who are at least 65 years old or single parents with a dependent child.
- Tax class 2 applies to married taxpayers, widowed taxpayers (for the first three years after the death of the spouse), divorced or separated people (for the first three years), civil partners, and some married non-resident taxpayers.
The tax class you are assigned will depend on your situation, such as your marital status, age, and dependents.
What is the difference between tax class 1 and tax class 2 in Luxembourg
The main difference between tax class 1 and tax class 2 in Luxembourg is that tax class 2 is reserved for married couples, civil partners, and widows/widowers in their first three years of bereavement, while tax class 1 is for single people, married couples who have opted for separate taxation, and some married non-resident taxpayers.
Tax class 2 allows joint taxation, meaning that the couple is taxed together on their combined income, which can lead to a reduction in their overall tax burden. Additionally, tax class 2 provides certain tax benefits such as double the tax relief for certain types of expenses and eligibility for the extra-professional allowance under certain circumstances. However, tax class 1 may be more advantageous for those with higher incomes or those who prefer to have their tax affairs separated from their spouse or partner.
What are the tax implications of being in a domestic partnership or PACS
Being in a domestic partnership or PACS can have tax implications in Luxembourg. For instance, civil partners who opt to be taxed jointly are treated the same way as married couples, meaning they will benefit from tax advantages — joint taxation in tax class 2 on all their combined income and eligibility for double tax relief on certain types of expenses.
However, for direct taxes in Luxembourg, civil partners are precluded from joint monthly taxation at source, and their tax cards are unaffected by their partnership. Additionally, resident or non-resident taxpayers in civil partnerships (formed in Luxembourg or abroad) are only taxed jointly after the year has ended. It happens by assessment, at their request, by filing the Form 100 income tax return. It's important to seek professional advice to understand the tax implications of being in a domestic partnership or PACS in Luxembourg.
Can non-residents be assigned a tax class in Luxembourg
Yes, non-residents can be assigned a tax class in Luxembourg if they meet certain criteria. For example, if a non-resident is married to a resident taxpayer, they may be assigned to tax class 1 or 2 depending on their circumstances.
Similarly, if a non-resident has income from a source in Luxembourg, they may also be assigned a tax class based on their income and personal circumstances. It's important to note that non-residents may have different tax obligations and may be subject to different tax rates than residents, so it's important to seek professional advice to ensure compliance with Luxembourg tax laws.
Read more in our special article about Tax residency in Luxembourg.
