Luxembourg Personal Tax in 2025: Key Updates and Practical Considerations
Several tax measures were introduced in 2025 affecting employees, families, cross-border workers and retirees. This article summarises the developments most relevant to individuals, together with upcoming changes that may influence planning for 2026 and beyond.
2025 changes: Income Tax, Family Measures and Employment Incentives
In 2025, the income tax scale has been adjusted to reflect accumulated indexations giving modest tax relief to most households. Employees earning the non-qualified minimum wage now fall outside the income tax net. Tax Class 1A has been brought more closely into line with Class 2, and increased credits and higher ceilings for extraordinary expenses continue to support families with dependents.
Young workers benefit from two targeted measures: the rental allowance to offset high accommodation costs, and the new starter-bonus regime for employees under 30, allowing employers to grant tax-free bonuses within annual limits.
Companies can still use the profit-sharing scheme (“prime participative”), which permits bonuses to benefit from a 50% tax exemption up to a salary-based cap. Revisions to the inpatriate regime have simplified eligibility and benefits helping Luxembourg remain competitive in attracting international talent.
Benefit-in-kind rates for company cars continue to favour electric vehicles, with combustion engines subject to increased taxable benefit-in-kind charges.
Cross-border workers can benefit from the overtime tax credit where applicable, but physical-presence limits continue to be critical. Exceeding the allowed days outside Luxembourg may trigger taxation in the country of residence and create double-tax situations unless addressed through relief procedures.
Luxembourg–UK Tax Treaty: Pensions and the Article 29 Election
The new Luxembourg–UK double tax treaty allocates the primary taxing right for most pensions to the paying country which is a significant change from the former treaty which allocated taxing rights to the resident country.
For Luxembourg-resident individuals receiving UK pensions (including the UK State Pension and most private or occupational schemes), this means the UK may now tax the pension, with Luxembourg applying exemption-with-progression.
Taxpayers should be aware of the Article 29 election, which allows a taxpayer to make an irrevocable election for the provisions of the old treaty to apply. Taxpayers will need to meet certain conditions to qualify to make the election – currently, guidance is pending from the UK/Luxembourg tax offices on the eligibility and format for the election to be made.
Real Estate and Rental Income
Real estate continues to be a focal point of fiscal policy. Reductions in purchase taxes and increased mortgage interest deductions for main-residence acquisitions and eligible rental investments remain available for a limited time.
With the increase in short-term/vacation rental income it is important for taxpayers to understand the reporting differences. Long-term residential leases are generally taxed as rental income, while frequent short-term or vacation lettings are generally considered as commercial activities. Allowable expenses are often reduced where there is mixed-use and/or periods of non-occupation.
Appeals and Dispute Resolution
Taxpayers have three months from receipt of an assessment to lodge an objection with the local tax office and receive an amended assessment. If unresolved, an appeal can be escalated to the “Direction”, although this can take considerable time to be processed. For cross-border issues involving potential double taxation or other situations in breach of double tax treaty provisions, a Mutual Agreement Procedure may be introduced.
Looking Ahead
For 2026, the government is considering increasing the private pension deduction cap to EUR 4,500 and introducing incentives to support employment up to age 65. A more detailed carried-interest regime is also under development.
Longer-term plans include a major shift towards individual taxation from around 2028, phasing out joint taxation and the tax-class system over approximately 20 years.
Final Notes and Deadlines
The filing deadline for 2024 Luxembourg tax returns is 31 December 2025. Individuals should review eligibility for credits, consider cross-border day limits, and assess the implications of the Article 29 pension election. Given the complexity and potential permanence of certain choices, professional advice remains essential.