Luxembourg's 2026 tax reform: what will change for citizens and businesses?

The upcoming changes in 2026 and the subsequent transition to 2028 mark a shift from collective taxation of households to complete individualisation. This strategy aims not only to simplify fiscal procedures, but also to address deep-rooted structural problems: from combating child poverty to encouraging labour participation among people approaching retirement age. In the context of inflationary pressure and the need for an energy transition, Luc Frieden's government is proposing a model that combines tax liberalisation with enhanced targeted social support.

Historical context and philosophy of Bill No. 8676

For a long time, Luxembourg's tax system was based on the concept of tax classes (1, 1a and 2), where family status played a decisive role in determining tax liabilities. This model, which had existed in its basic principles since 1842, assumed that married couples were taxed jointly, which often discouraged the second member of the family from entering the workforce due to the progressive tax scale.

Bill No. 8676, officially presented by the government on 6 January 2026, proposes a radical break with this tradition. Its main objective is to introduce a single tax class (Tarif U) and to move to mandatory individual taxation for all individuals, regardless of their marital status. The government argues that this is necessary to modernise the system, which should become more neutral and fair, reflecting the diversity of modern forms of cohabitation and partnership.

Transition to a single tax class (Tarif U)

The introduction of Tarif U is planned as the main mechanism for simplifying the tax system. From the 2028 tax year, the current three-class system will be abolished. Each taxpayer will be treated as a separate entity, responsible solely for their own income.

Key parameters of the new scale include a significant increase in the tax-free income threshold. While in 2025 the first tax bracket provided for tax exemption of up to €13,230, under Tarif U this threshold will rise to €26,650. This decision is aimed at supporting the purchasing power of the population in the context of rising living costs. In addition, the new scale will have fewer tax brackets, which will make calculations more transparent for ordinary citizens.

Transition period and protection of existing couples' interests

Recognising the scale of the changes, the legislator has provided for an unprecedented transition period of up to 25 years. Couples who entered into marriage or civil partnership before 1 January 2028 will be able to continue to enjoy the benefits of joint taxation (splitting mechanism) until the end of the 2052 tax year.

A temporary Tarif T scale will be introduced for this category. However, couples will retain the right to voluntarily and irrevocably switch to individual taxation under Tarif U at any time. The government emphasises that this flexibility is necessary to protect the long-term financial plans of households that have taken out loans or planned their budgets based on the old system.

Mateneen Package: Social Compensation and Family Support

The 2026 reform is not limited to changes in tax brackets. It includes a powerful social support package called "Mateneen." This set of measures is designed to combat poverty and strengthen social cohesion, especially for families with children.

Direct payments and family benefits

From 1 January 2026, changes to the payment system administered by the Caisse pour l'avenir des enfants (CAE) will come into effect. The main adjustments include a structural increase in monthly family allowances (Kannergeld):

• For children under 12 years of age, the amount increases by €45.
• For children over 12 years old — €60.

In addition, the government has revised the back-to-school allowance (allocation de rentrée scolaire), increasing it by €60 for the 6–11 age group and by €90 for teenagers aged 12 and over. For low-income families, there's extra targeted financial help, which can be up to €3,000 a year per school-age kid.

An important innovation is the introduction of a fourth part of the childbirth allowance (prime de naissance), as well as the mandatory automatic indexation of all types of Zukunftskees benefits, which previously did not always occur in line with inflation.

Tax breaks for new parents and in unusual situations

Bill No. 8676 introduces special mechanisms for accounting for child-rearing expenses in tax returns:

Incentives for working pensioners

One of the most innovative measures of 2026 is the introduction of the Abattement de Maintien dans la Vie Professionnelle (AMVP) tax deduction. This initiative aims to address the issue of low employment among the older generation in Luxembourg.

AMVP mechanism and conditions

The AMVP deduction is intended for individuals who meet the conditions for early retirement but decide to continue working until they reach the statutory age of 65.

• The deduction amount can be up to €9,000 per year (or €750 per month).
• The taxpayer must obtain a certificate from the pension authority (e.g. CNAP) confirming their entitlement to early retirement.
• The deduction significantly reduces the tax base, leading to an increase in net income. For a person with an income of €50,000, the savings can amount to more than €3,000 per year.

This measure is seen by experts as a response to demographic challenges and staff shortages. In Luxembourg, employment in the 55–64 age group is only around 44%, which is significantly lower than the OECD average (61%) and the figures for neighbouring Germany (over 70%). The AMVP creates a direct financial benefit for experienced professionals who wish to remain active participants in the labour market.

Pension contribution reform

In parallel with the stimulus measures, the 2026 budget provides for an increase in the pension contribution rate from 24% to 25.5%. The increase is divided equally between the employee, the employer and the state (0.5% for each party). This decision is necessary to ensure the long-term sustainability of the pension fund against the backdrop of an ageing population and a gradual increase in the early retirement age.

Reform of the Childcare Support Allowance (CSA) system

The Chèque-service accueil (CSA) system is the cornerstone of Luxembourg's social policy in the field of pre-school and extracurricular education. From 2026, the rules of the game will change to make the system more transparent and financially beneficial for parents.

According to government estimates, these measures will enable families to save significant amounts of money. For example, for a family with a two-year-old child attending non-contracted childcare facilities (non-contracted SEA), the annual savings could be as high as €5,064.

Indexation of incomes and combating inflation

Luxembourg continues to adhere to a unique system of automatic indexation of wages and pensions, which is the subject of ongoing discussions between trade unions and employers. Inflation is expected to stabilise at around 1.8% in 2026.

According to STATEC, the next index (a 2.5% salary increase) is likely to occur in the second quarter of 2026 (April to June). This will happen when the consumer price index exceeds the set threshold.

For employees, this means an automatic increase in gross salary. However, it is important to consider the "progression effect": as nominal income rises, taxpayers may move into a higher tax bracket. To offset this negative effect, the government is introducing a mechanism in Bill No. 8676 to automatically adjust the tax scale after every three indexation tranches, starting in 2028.

Environmental taxation and energy transition

Luxembourg's climate agenda for 2026 is closely linked to the European Fit-for-55 initiatives. The CO2 tax remains the main instrument for decarbonisation.

In 2025, the tax rate was €45 per tonne. From 1 January 2026, it will increase by €5 to €50 per tonne of emissions. The revenue from this tax will be used to finance environmental projects and social compensation.

To protect low- and middle-income households from rising fuel and heating costs, the government is increasing the CO2 tax credit (CI-CO2). From 2026, the maximum amount will rise from €192 to €216 per year.

Luxembourg is also preparing to implement the pan-European ETS2 emissions trading system (covering buildings and road transport). Initially, the launch was planned for 2027, but due to concerns about a sharp rise in energy prices, the date was postponed to 1 January 2028. At that point, the national CO2 tax will be replaced by European quotas.

Other tax incentives and benefits for 2026

In addition to global structural changes, the 2026 tax package includes a number of targeted measures to support investment and private savings:

The 2026 reform has provoked mixed reactions. While the business community generally welcomes individualisation and incentives for older people to work, trade unions have expressed serious concerns.

The largest trade union associations criticise the government for allegedly financing the reform through "under-indexation" of the tax scale in previous years. They point out that the 25-year transition period for those who stand to lose out from the reform (e.g. couples with a very large income gap) is excessive and creates administrative chaos. In addition, the trade unions are insisting on tougher taxation of capital and large fortunes instead of focusing exclusively on personal income tax.

Employers' organisations support the introduction of AMVP, noting that Luxembourg cannot afford to lose skilled workers aged 55+. However, they are concerned about the increase in social security contributions and automatic indexation, which they believe reduces the competitiveness of Luxembourg companies in the international market.