Luxembourg Announces New Tax Breaks, Allowances to Combat Poverty

As part of a general government policy to strengthen household purchasing power, new tax breaks were announced on Friday 19 July 2024, such as the adaptation of the tax scale to indexation, the tax exemption of the minimum social wage or the increase in the single-parent tax credit.

The Ministry of Family Affairs, Solidarity, Living Together and Reception of Refugees, emphasised that it is “essential” to continue to strengthen efforts to support disadvantaged households in a targeted manner. To achieve the stated goal, targeted measures will be implemented as part of the fight against poverty, and in particular against the non-use of social benefits. Thus, the ministry emphasised that the cost of living allowance and the energy bonus will be increased substantially, while access to these benefits will be considerably facilitated.

Specific measures will accompany the gradual expiration of the cap on energy prices. The increased energy premium and broader eligibility were key measures aiming to help vulnerable households avoid new financial problems and reduce the risk of more people falling into poverty.

"Luxembourg has a fairly efficient social assistance system, but it is important to continue to adapt it to the needs of the target populations in times of economic difficulties and inflationary pressures. But above all, as a government, we must ensure that existing benefits reach the households that need them, in particular through administrative simplifications," stressed Luxembourg's Minister for Family Affairs, Solidarity, Living Together and Reception of Refugees, Max Hahn.

As an important social benefit aimed at providing targeted support to the most vulnerable households, several significant changes will be made to the cost-of-living allowance starting in 2025. The amount of the cost-of-living allowance will be permanently increased by 10% to account for the general evolution of prices. For example, a single-person household (with a maximum gross income of €2,710) will receive €1,817 instead of €1,652. A two-person household (maximum gross income of €4,065) will benefit from €2,272 instead of €2,065, and a four-person household (maximum gross income of €5,692) will receive €3,182 instead of €2,891. Additionally, the cost-of-living allowance and the energy bonus will be automatically paid to beneficiaries of the inclusion allowance.

Since, according to the latest estimates, more than 30% of beneficiaries of the inclusion allowance, who are also eligible for the cost-of-living allowance and the energy bonus, do not apply for them, the automatic granting of these two benefits should constitute a key step towards administrative simplification contribute to the fight against non-take-up, according to the ministry.

In order to also combat non-take-up of municipal social benefits, the National Solidarity Fund (FNS) will in future automatically communicate to municipalities the data of beneficiaries of the cost-of-living allowance residing in the territory of the respective municipalities. In this way, municipal administrations will also have the possibility of introducing an automatic payment of municipal aid based on the cost-of-living allowance.

A sudden increase in energy prices following the reduction of the price cap risks confronting a certain number of low-income households with financial difficulties, the ministry stressed. To avoid further weakening of an already vulnerable population, the amount of the energy premium will be increased substantially, namely by a factor of three. Note that the maximum gross monthly income threshold is 25% above that for the cost-of-living allowance, thus benefiting a higher number of households.

For example, this means that a single-person household (with a maximum gross income of €3,388) will receive an energy bonus of €600 instead of €200, a two-person household (maximum gross income of €5,082) will receive €750 instead of €250, and a four-person household (maximum gross income of €7,115) will receive €1,050 instead of €350. Consequently, beneficiaries of the cost-of-living allowance and the energy bonus will see a cumulative increase in these benefits next year, amounting to €2,417 (up €565) for a single person, €3,022 (up €707) for two people, and €4,232 (up €991) for a four-person household. Additionally, a reduced energy bonus will be introduced, broadening the circle of beneficiaries.

In order to ensure a certain regressivity of the energy bonus and to avoid households whose income is slightly above the threshold being completely excluded, a reduced energy bonus will be introduced. This corresponds to half the amount of the energy bonus and benefits households with a monthly income between 25% and 30% above the threshold for the cost-of-living allowance:

A single-person household with a maximum gross income of €3,523 will thus be eligible for a reduced energy bonus of €300, a two-person household with a maximum gross income of €5,285 will receive €375, and a four-person household with a maximum gross income of €7,399 will benefit from €525. Additionally, there will be other changes to the terms of the cost-of-living allowance.

Several changes will be made to the procedural aspect as well as the criteria for being able to benefit from the cost-of-living allowance and the energy bonus. To facilitate access to these benefits, the deadline for applying is postponed from 31 October to 31 December. It will also be possible for an applicant to submit a second application during the same year. Until now this was not possible, which excluded people whose application had been refused due to not meeting the conditions, but who were likely to meet them at another time.

In addition, the reference period during which the applicant must reside in Luxembourg to be able to benefit from the cost-of-living allowance and the energy bonus is reduced from twelve to three months. Another new feature concerns allowances or benefits paid by a public or private body, which from 2025 will no longer be taken into account as income to determine the right to the benefits in question.

While certain allowances are already not considered, such as family allowances, in the future all kinds of allowances or benefits will be disregarded, such as the interest subsidy, the rental subsidy or aid from charitable associations.

Finally, to support young workers who are staying in their parents' domestic community for longer and longer due to the increasingly complicated access to affordable housing, the professional income of people under 30 will no longer be taken into account either.

Furthermore, to facilitate access to social benefits and reduce the rate of non-use of these, the FNS in collaboration with the ministry will implement, or has already implemented, various measures:

• publication on the FNS website of a calculator to determine eligibility;
• sending of the pre-filled form to the beneficiaries of the previous year;
• production of explanatory leaflets and videos in seven languages;
• increase and sustainability of the tax credit equivalent (ECI).

The tax credit equivalent (ECI) will be made permanent for beneficiaries of the basic flat-rate amount per adult due under the law of 18 July 2018 on social inclusion income, as well as for beneficiaries of income for people with a severe disability. The amount of the ECI will be increased to €90.

The State's contribution to financing the increase in energy costs for accommodation facilities for the elderly will also be renewed for the year 2025, the ministry added. In return, service providers benefiting from this contribution undertake not to increase prices during the period in question, except for increases due to an adaptation of rates to the cost-of-living index.