How to optimise your taxation as a young worker?
When you enter working life, you also discover work related taxation. In Luxembourg, a fraction of your salary is automatically retained as “withholding tax” (“retenue à la source” in French). However, you can adopt several strategies to limit the impact of taxes on your income.
You've just started working and you don't know what to expect in terms of taxation? This is actually quite normal. In Luxembourg, tax is deducted as “withholding tax” on the gross amount of your salary. This amount varies according to various criteria and, in some cases, it may be partially refunded. In addition, each year, you can file a tax return that may allow you to recover a certain amount of money by filling in the amounts you've invested, especially in savings and pension products.
Remember to make an annual adjustment (“décompte annuel”)
Before discussing the various expenses that you can fill in your tax return to obtain a partial refund, it is worth reminding a point that applies to young workers in particular. Indeed, for your first job, it is more than likely that you will start working in the course of the year. However, the amount that will be automatically deducted from your monthly salary will be calculated as if you had earned that salary throughout the whole year. Suppose you start working on 1st September and that your monthly taxable income is 2,500 euros. If you are single, you will be taxed 212.60 euros per month (2017 scale) or 850.40 euros for the months of September to December. Your annual taxable income is 10,000 euros, the amount for which no tax is due.
Fortunately, there is a way for you to get a refund for the portion of your taxes that was overpaid. You will need to complete the "Annual adjustment” (“décompte annuel”) form available on the website of Luxembourg Inland Revenue (“Administration des contributions directes”) and submit it no later than on 31st December of the year following that of the adjustment.
Please note that there are two versions of the "Annual adjustment” (“décompte annuel”) form, one for residents ( 163 R) and one for non-residents (163 NR).
Forms of deductible savings
To encourage citizens to build their nest egg, the government promotes various tax savings and retirement products. The sums invested in these products can be deducted - within the limits prescribed by law - from the taxable income of taxpayers. All you have to do is to indicate them on your tax return.
Home loan savings contract
The home loan savings contract offers three main advantages:
- it helps build savings for the future acquisition of a home;
- it opens up the right to a loan at a favourable fixed rate, which protects you from possible market fluctuations;
- it offers the possibility of tax deductions for premiums paid as special expenses.
For each household member, an amount of up to 1,344 euros per year can thus be deducted - if the youngest adult subscriber is under 40 - and of up to 672 euros per year for adults over 40.
Other options are available to young and old taxpayers, to accumulate capital while benefiting from tax deductions laid down in the law, such as life insurance.
This allows both:
- to build up capital that will be released to the investor at maturity of the contract;
- to protect your relatives in the event of death.
Up to 672 euros of insurance premiums can be deducted per year and per person in the household.
Pension savings plan
When you're a young worker, retirement does not usually come to mind. But the sooner you start saving, the greater the amount available upon your retirement. By saving through a pension savings insurance, you can also deduct your tax payments up to an amount of 3,200 euros per year.
By adopting these few reflexes early on in your working life, you are sure to have a happy retirement. A good idea, considering how little optimism all specialists have when it comes to the amount of future pension benefits...