Luxembourg is abolishing its tax classes. Here is what replaces them, and who wins

Luxembourg intends to abolish its income-tax classes. Under Bill 8676, tabled on 6 January 2026, the familiar division into classes 1, 1a and 2 would disappear on 1 January 2028 and be replaced by a single scale — Tarif U — applying to every taxpayer regardless of marital status. The tax-free allowance would double from €13,230 to €26,650, and the number of brackets would fall from 22 to 10.

It is the most consequential change to Luxembourg personal taxation in a generation, and its politics are entirely contained in one question: what happens to married couples, who currently enjoy the most favourable treatment in the system.

What the classes do today, and why they are going

Today a taxpayer's class is a function of civil status. Class 1 covers single people, class 1a single parents and some pensioners, and class 2 married couples and registered partners who elect joint taxation. Class 2 applies income splitting: the couple's combined income is halved, taxed, and doubled again, which pushes a large share of household income into lower brackets. On a single-earner household the advantage is substantial.

The objection is that this ties a person's tax bill to their marital status rather than to what they earn, and that it penalises second earners — overwhelmingly women — whose additional income is effectively taxed at the household's marginal rate from the first euro. Individual taxation is the direction of travel across Europe, and Bill 8676 is Luxembourg's move in that direction.

Tarif U: one scale for everyone

• A single class. Every taxpayer falls under the same scale, whatever their civil or legal status.
• A doubled tax-free allowance. €26,650 instead of €13,230, which is where most of the relief for single people is concentrated.
• Ten brackets instead of 22. A simplification of a scale that currently climbs in many small steps between 8% and 42%.
• Automatic transition for classes 1 and 1a. Those taxpayers move to Tarif U without doing anything, and are expected to see immediate relief.

The gain for a single earner is the point of the exercise. Doubling the allowance removes a substantial slice of income from tax altogether, and class 1 taxpayers — long the most heavily taxed group relative to their income in Luxembourg — are the intended beneficiaries. It also removes a persistent source of confusion, since class 1a has never been well understood: it currently captures single parents alongside widowed and older taxpayers, groups with very little in common beyond falling outside the other two categories. Collapsing all three into one scale ends that arbitrariness, and with it the annual ritual of taxpayers discovering that a change in personal circumstances has quietly moved them between classes.

Tarif T: the 25-year protection for existing couples

Couples already benefiting from class 2 do not lose it. The bill creates a transitional arrangement, Tarif T, under which they retain their current treatment for 25 years — through 2052. According to KPMG's analysis of the bill, roughly 85% of class 2 taxpayers are nonetheless expected to be better off under the new arrangements.

The choice is not locked. Under the bill as tabled:

• A joint election to move to Tarif U can be made before 30 November 2027, taking effect on 1 January 2028.
• An individual annual opt-out is available before 30 November of each year through 2051, taking effect the following year.
• Protection on death or divorce is extended from three years to five, softening the cliff that currently follows the end of a marriage.

Every household on class 2 therefore faces a genuine calculation rather than a default, and the answer depends on how evenly the couple's incomes are split. Where one partner earns most of the household income, splitting remains valuable and Tarif T is likely to win. Where both earn comparably, the doubled allowance applied twice can outweigh it.

The family measures, and when they land

The bill is not only a rate reform. A package of family measures accompanies it, some arriving before the scale itself:

• A new early-childhood allowance of €5,400 per year for each child under three.
• The allowance for a child not part of the household rises from €5,424 to €5,928.
• The single-parent tax credit rises from €3,504 to €4,008.
• The flat-rate childcare and dependency allowance rises from €5,400 to €6,000.
• A joint-custody bonus of up to €922.50 per child, phased out above €76,600 of income.
• A deduction for working pensioners of up to €9,000 a year for those entitled to early retirement who continue working.

Two deduction ceilings also rise: interest on private loans and insurance premiums from €672 to €900 per household member, and home-savings contributions to €1,500 for those aged 18 to 40 and €900 for everyone else, per household member.

Family benefits and childcare, from 2027

Ahead of the scale reform, monthly family allowances rise by €45 for children under 12 and €60 for those over 12, with the back-to-school allowance up €60 for ages 6 to 11 and €90 from age 12. A fourth tranche of birth grants is introduced, and targeted assistance of up to €3,000 per child annually is directed at low-income households. The childcare voucher system is reformed to deliver an estimated €79 million a year in household savings, with 20 hours a week of free parental-assistant care for children from age one for families earning up to 3.5 times the social minimum wage, and a target of placing every child needing care by 2030.

The quiet administrative change

One measure will touch more people than any bracket. The bill abolishes the annual wage-tax adjustment return — the décompte annuel — and replaces it with an optional assessment regime. For the many employees whose only interaction with the tax administration is that form, the mechanics of reclaiming overpaid withholding will change entirely.

The end of cold progression

The reform also addresses the structural problem that has driven Luxembourg tax policy for a decade. Because wages are automatically indexed to inflation while the tax scale is not, indexation pushes taxpayers into higher brackets without any real gain in purchasing power. The bill introduces an automatic adjustment of the scale — under the mechanism as drafted, after every three index tranches — so that the correction no longer depends on a political decision each time. Ad hoc adjustments of 4 index brackets in 2024 and 2.5 in 2025 were exactly the kind of intervention this is designed to make routine.

What to do now

Nothing is law yet: Bill 8676 was tabled in January 2026 and must complete its parliamentary passage, and figures may change before it does. But the dates already matter. Couples on class 2 have until 30 November 2027 to make a joint election, and that decision should be modelled on the actual split of incomes rather than assumed. Anyone in class 1 can expect relief without acting. And for those approaching retirement, marriage or separation, the five-year protection window is a materially better position than the current three.

Our explainer on the current tax classes 1, 1a and 2 sets out what is being replaced, and our coverage of the 2026 budget and the startup investment tax credit covers the measures already in force.