An employee's salary is subject to an automatic deduction in the form of income tax.
This withholding at source is done by the employer on each salary payment.
In certain cases, the employer may have to make an annual adjustment, in order to adjust the withholding tax deducted throughout the tax year and, if applicable, refund the employee any tax surplus withheld at source.
The annual adjustment involves comparing the annual amount of withholding tax with the annual income tax effectively owed by the employee.
Who is concerned
Any employer who employs more than 10 people on 31 December of the year in progress must make an annual adjustment for each employee.
N.B.: an employer who employs less than 10 people may make an annual adjustment, but he is not obliged to do so.
However, the employer does not have to make an adjustment for employees:
- who worked for another employer at some time during the calendar year or who left the business during the year;
- whose annual taxable income exceeds EUR 100.000;
- whose tax class or number of children under care registered on the tax card has changed during the tax year;
- who did not provide a tax card;
- who have an additional tax card or a main tax card which indicates the existence of one or more additional tax card(s);
- who received occasional salaries from another employer during the year;
- to whom the employer has paid extraordinary remunerations during the year;
- with regard to whom the administration has notified the employer that he does not need to make an annual adjustment.
An employer is not allowed to not carry out an annual adjustment for non resident employees who:
- are pensioners;
- had a job abroad and a job in the Grand Duchy of Luxembourg at the same time during the year;
- are exempt from all or part of the tax deduction due to an international agreement.
Persons who started work during the year in Luxembourg or who changed employer during the year and also endured periods of unemployment without receiving benefits may submit an application for a salary tax rebate by annual adjustment to the RTS tax office of their domicile. In fact, as the withholding tax rate at source is based on a monthly fixed salary over 12 months, it is in this case based on a higher level of annual income than is actually received for the year. The calculated tax is therefore too high and will be reimbursed via the annual adjustment.
The application must be submitted to the tax office before 31 December of the year following the adjustment.
When making an annual adjustment, it is assumed that:
- the employer regularly declares and pays the tax deducted from salaries;
- the employee has given his tax card to his employer for the current tax year.
Only taxpayers who fulfil one of the following conditions are eligible for an annual adjustment:
- be domiciled or have a regular residence in the Grand Duchy of Luxembourg during the 12 months of the tax year concerned;
- be employed in the Grand Duchy of Luxembourg for 9 consecutive months during the tax year concerned;
- have carried out a salaried activity in the Grand Duchy of Luxembourg and receive a gross payment representing 75 % of the total annual gross pay and allowances and other similar advantages in lieu thereof;
- have requested, if they do not receive the tax bonus for children (boni pour enfant), a tax rebate for children as well as, if applicable, tax relief for children over 21;
- have requested the single parent tax credit.
How to proceed
Annual adjustments carried out by the employer
The employer must make the adjustment to the following elements:
- the annual income: it corresponds to the annual semi-net remuneration;
- annual tax due: deductions on annual semi-net remuneration are determined by applying the annual income tax rate schedule;
- tax deducted along the year.
The employer calculates the balance of the annual adjustment, i.e. the difference between the annual tax due and the tax deductions made.
When comparing these amounts, 2 scenarios are possible:
- the amount of tax deductions exceeds the annual tax due:
- in this case, the employer refunds the difference to the employee by reducing the income tax withheld on the last salary of the tax year;
- the amount refunded to the employee is then deducted from the total declared tax withheld during the last period for the withholding tax declaration of the tax year and only the difference is transfered to the Luxembourg Inland Revenue;
The declaration form for withholding tax on income is designed in order to take into account this particular situation.
- the amounts withheld are lower than the annual theoretical tax due: in this case, there is no additional deduction.
Example of annual adjustment
An employee receives an annual gross salary of EUR 25,308 (below EUR 100,000). The employee is set in tax class 1. His main tax card indicates that an additional tax card has not been issued. The main tax card of the employee has the following deduction: FD code EUR 1,397 per year.
The non ('no') box for sickness allowance is ticked. The employee has more than 2 years' seniority and is still employed in the business on 31 December 2012. The business has 500 employees.
Based on this information, the employer can carry out the annual adjustment.
Withholding tax on the tax card
Annual semi-net remuneration
Income tax on the salary deducted by the employer (based on the monthly tax schedule)
Tax due according to the annual schedule
The tax due according to the annual schedule is higher than the tax deducted by the employer.
The salaried worker owes 1,109-996= EUR 113 to the Luxembourg Inland Revenue.