Income Tax Brackets In Luxembourg

Income Tax Brackets In Luxembourg: Explained

Welcome to the fiscal jungle of Luxembourg! If you’re attempting to scale the cliffs of income tax brackets here, you’re in the right place.

This guide your trusty sherpa, guiding you through the craggy landscapes of tax rates, bands, and deductions. Ready to embark on a whirlwind tour of financial wisdom?

Let’s get fiscal!

Income Tax Brackets

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Income tax is paid in Luxembourg by everyone who receives any income, not just salaries; this can include the net revenue from renting out property in Luxembourg or investment income.

Although there are various types of taxable income, each with its characteristics, taxes are generally based on a progressive income tax system. A progressive income tax rate framework indicates that the more you earn, the more taxes you pay.

Luxembourg’s Income Tax System

  • Expats must pay income tax on their earnings in Luxembourg, whether they work for an organization or are self-employed. Residents must pay tax on their worldwide income, whilst non-residents must only pay on income obtained in Luxembourg.
  • Workers are assigned a tax class depending on their marital and residency status, which determines how much income tax they pay, along with their wages.
  • Regular taxpayers in Luxembourg typically have their income tax contributions deducted from their paychecks. 

However, they must still file an income tax return with the Luxembourg Inland Revenue (Administration des Contributions directes – ACD) to confirm they are paying the necessary amount. This is known as assessment taxation.

  • Some self-employed taxpayers are required to make advance quarterly payments. These payments are made during the tax year in March, June, September, and December.

Since 2018, married couples have been able to choose between separate and joint taxation.

Who Pays Income Tax In Luxembourg?

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Workers in Luxembourg are assigned a tax class based on their circumstances. The three tax categories are as follows:

1: Separately taxed married taxpayers, single people, and certain married non-resident taxpayers.

  • 1a: Individuals over the age of 65, single parents with dependent children

2: Married taxpayers, widowed taxpayers (during the first three years following the spouse’s death), divorced or separated people (for the first three years), civil partners, and some married non-resident taxpayers.

3: Non Resident Taxpayers, Since non-residents are not entitled to the same deductions as resident taxpayers, the classification system may result in varying income tax bills for residents and non-residents.

Non-residents who earn more than 90% of their global income in Luxembourg or less than €13,000 outside of Luxembourg may choose to be considered residents.

On the other hand, Belgian citizens need to earn half of their professional income in Luxembourg to be eligible.

Earnings And Income Tax In Luxembourg

In Luxembourg, the following forms of payments are subject to income tax:

  • Net earnings from work or self-employment
  • Commercial profits, Profits from trade or business
  • Agriculture and forestry profits 
  • Net income from pensions and/or annuities (tax on any monthly pension income)
  • Investment earnings
  • Net income from rental property
  • Other net income (such as capital gains)

Employment Benefit Taxes

Employee benefits such as healthcare plans and pay reduction plans are often taxable. Benefits in kind are often valued at their market worth. However, some are valued as a lump sum.

The Luxembourg government implemented a tax policy in 2021 that allows employees to share in corporate profits. Bonuses are only excluded from individual income tax if they are within 25% of the employee’s gross basic annual wage.

Another recent tax reform affects highly skilled workers hired from abroad. To qualify for Luxembourg’s immigrant scheme 2023, an employee must earn a minimum annual basic income of €75,000 (down from £100,000 in 2022).

The worker must also be a Luxembourg resident, and their employment must not replace the talents of a local employee. If these conditions are met, they are eligible for a 50% tax exemption of up to 30% of the expatriate’s yearly basic pay.

Rental Income Taxes

In Luxembourg, those renting out their homes must pay tax on their net rental income. This is calculated by deducting permitted expenses from the monthly rent.

Insurance, property taxes, rental charges, depreciation (if applicable), and debt interest on a mortgage are all examples of expenses.

Luxembourg Tax Return And Income Tax Deadlines 

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Luxembourg’s tax year runs from January 1 to December 31. Tax returns for 2022 must be filed by December 31, 2023

In February, you should receive an invitation to download and electronically complete your form on the Inland Revenue website, or you should receive the paper form (Form 100). 

Residents have been able to fill out Form 100 online with the help of the tax authority’s electronic assistant since February 2022. If you need an extension, you must apply to your local tax office in writing.

How To Make A Declaration?

Suppose you have income from a liberal profession, a paid occupation, a pension, or a rental income. In that case, you can file your personal income tax return online through the MyGuichet.lu portal.

 In this scenario, you must Create a MyGuichet account first, then follow the step-by-step procedures on the platform; otherwise, you will need to fill out a paper form.

The only difference is that when you do it online, the digital form guides you step by step through the process, and you can attach supporting documents digitally. In contrast, when you do it on paper, you must attach documents and mail the form to the competent tax office.

 It may be helpful for some professionals who are permitted to file declarations using online help.

Luxembourg Income Tax Rates

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Luxembourg levies income tax on a progressive system/scale with 23 brackets ranging from 0% to 42%. Workers must additionally contribute 7% to 9% to the employment fund.

The first €11,265 is tax-free, with the lowest rate of 8% applied afterward. Earnings over €200,004 are subject to a top rate of 42%.

In 2023, the brackets are as follows:

FromTo%
€ 0€ 11,2650%
€ 11,266€ 13,1738%
€ 13,137€ 15,0099%
€ 15,009€ 16,88110%
€ 16,881€ 18,75311%
€ 18,753€ 20,62512%
€ 20,625€ 22,56914%
€ 22,569€ 24,51316%
€ 24,513€ 26,45718%
€ 26,457€ 28,40120%
€ 28,401€ 30,34522%
€ 30,345€ 32,28924%
€ 32,289€ 34,23326%
€ 34,233€ 36,17728%
€ 36,177€ 38,12130%
€ 38,121€ 40,06532%
€ 40,065€ 42,00934%
€ 42,009€ 43,95336%
€ 43,953€ 45,89738%
€ 45,897€ 100,00239%
€ 100,002€ 150,00040%
€ 150,000€ 200,00441%
€200,004+ 42%

How Much Income Tax Will I Have To Pay?

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The table from PwC table below provides recommendations on how much you should expect to pay in income tax based on your tax class and earnings. These statistics include the additional tax contribution as well.

SalaryClass-2Class-1AClass-1
€20,000€0€0€921
€38,700€1,675€4,271€5,317
€58,000€5,113€12,325€13,081
€77,400€10,635€20,420€21,177
€116,000€26,614€36,699€37,456

Luxembourg Personal Tax Credits And Deductions

Every employee is entitled to a yearly lump sum deduction of €540 for professional expenditures. The following deductions are also possible:

Commuting Expenses

The amount you can deduct is determined by how far you reside from your workplace, but the maximum is €2,574.

Tax benefits for company automobiles are calculated by multiplying the miles by the car’s kilometer cost. The figures are determined by a mileage logbook; otherwise, a lump-sum method is an option.

Free Lodging

A 25% discount is available, or 17.5% if the lodging is supplied.

Gifts

Any gifts from seniority can be tax-free up to €4,500.

Overtime And Severance Pay

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There are tax advantages to working night shifts, Sundays, or public holidays. Severance compensation may also be tax-free depending on the circumstances.

Occupational Pensions

Contributions to a pension scheme made by an employer are taxed at a flat rate of 20%. Benefits are tax-free.

Loan Interest

If your employer gives you a loan with an interest rate less than 1.5%, you can get a tax break of up to €3,000 for mortgage loans towards your primary residence and up to €500 for personal loans.

Single Parent Deduction

Depending on their income, single parents are eligible for a tax credit ranging from €750 to €2,505. The maximum income limit for claiming a tax credit is €60,000.

Luxembourg Tax Refunds

If your tax return demonstrates that you were overcharged for income tax during the year, you can request repayment.

If you submit your tax return online or using Form 100, this will be done automatically. If this isn’t done automatically, you can use form 163R to request a yearly adjustment.

Tax Fines In Luxembourg

Starting in the month following the payment’s due date, income tax fines are fixed at 0.6% of the overdue payment per month.

If you successfully request a deadline extension, this cost will be waived for the next four months, and a payment schedule will be established. You will thereafter be charged interest at the following rates:

  • Between months 5 and 12, 0.1% per month
  • 0.2% per month for payments one to three years late, up to 0.6% per month for payments more than three years overdue.
  • In general, the tax office can decline an extension request if it considers you can easily pay the debt with your current earnings.

Residents And Non-Residents 

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Residents and non-residents earning direct income in Luxembourg must file their taxes by March 31 of the year following the tax year.

Residents and non-residents may not be required to declare taxes in Luxembourg under certain conditions. For example, if their annual income is less than a specific amount or if tax has already been withheld at the source, they may be excluded from filing a tax return.

 It’s critical to verify with the IRS or a certified tax adviser to see if these exemptions apply to your case.

Annual Tax Adjustment

It could be a good idea to think about using the annual adjustment procedure to alter your tax withholdings. The purpose of this technique is to figure out how much tax you owe depending on your total taxable income for the year.

 If the projected tax amount is less than the total tax withheld by your employer or pension fund, you will be refunded by the tax authorities.

Conclusion

And there you have it—the mysteries of Luxembourg’s income tax brackets, unveiled! We hope this guide has been your beacon through the misty realms of taxation, illuminating the pathway to clearer, simpler financial navigation.

Luxembourg Unlocked!

But wait! There’s lot more that you might be interested in following:

  • Tax Declaration In Luxembourg
  • Tax Consulting In Luxembourg
  • Tax Return Software In Luxembourg

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