A proposal for an additional adjustment to the tax table, equivalent to 1.5 wage indexations, has been formally submitted to the Chamber of Deputies.
This supplementary modification comes in the wake of the 2.5 adjustments previously determined by the last government, culminating in a total adjustment of four wage indexations. The intent behind this move, effective from 1 January, is to alleviate the strain on residents' incomes and, in part, offset the loss of purchasing power caused by the unaddressed "bracket creep" in the tax scale.
The Ministry of Finance informed our colleagues at RTL.lu that it will present several illustrative examples to the Finance Committee of the Chamber of Deputies and afterwards the public on Thursday. These examples aim to provide a tangible understanding of the net income increase that individuals can anticipate with the implementation of the adjustment.
As per the draft law, the initial threshold for taxation is set to rise to €12,438 from its current €11,265. The adjusted basic rate structure would entail an 8% tax on income ranging from €12,438 to €14,508 gross per year, followed by a 9% tax on the subsequent tranche up to €16,578, and so forth. The 39% rate would be applicable to income between €50,751 and €110,403, while the top tax rate of 42% is slated to apply from 1 January at €220,788, up from the current €200,004.
It is worth noting that the Christian Social People's Party (CSV) and the Democratic Party (DP) have opted against raising the top tax rate, emphasising the government's commitment to keeping Luxembourg's tax environment competitive on the global stage.
Given the complexity of the calculation involved, the Ministry cautions against potential errors for those attempting their own calculations. The outcome of the adjustment naturally varies based on factors such as the individual's tax bracket.
Previous examples provided by the Ministry of Finance, stemming from the initial 2.5 wage indexation adjustment following the Tripartite and Solidarity Pact 3.0, shed light on the financial impact. For instance, a family with a gross annual salary of €45,000 (partner 1) plus €36,000 (partner 2) and one child would experience a net income increase of €645 annually. Meanwhile, a single parent earning €50,000 with one child would see a €755 boost in net income. The relief for a bachelor with a gross annual salary of €60,000 would amount to €705, while a bachelor earning €36,119 annually would gain a comparatively lower €285.
With the proposed additional adjustment of 1.5 wage indexations, these amounts are expected to see a modest increase. While this adjustment provides financial relief to individuals, it naturally also incurs a cost to the state, estimated at €180 million. The cumulative effect of the full adjustment, incorporating four wage indexations, is projected to result in a fiscal income reduction of €480 million, according to the legislative project.
The new government intends to align the tax table to overall inflation over the next few years, provided this is feasible from a budgetary perspective.
The previous government had already implemented various measures to cushion the impact of inflation, including an increase in the upper limit for interest on deductible property loans. The current CSV-DP government aims to further increase the upper limit for homeowners.
As of 1 January 2017, there have been eight wage indexations, with the last adjustment to the tax table occurring during the 2017/18 tax reform.