For a single employee on an average income, the tax wedge reaches 40.3% in Luxembourg, above the average for OECD member countries. Photo: Shutterstock

For a single employee on an average income, the tax wedge reaches 40.3% in Luxembourg, above the average for OECD member countries. Photo: Shutterstock

You earn money in Luxembourg? Cool. But what do you have left after taxes and other deductions? And above all: how does that amount differ, depending on your personal situation? The OECD on 30 April published its “Taxing Wages 2025” report. The differences are more striking than they appear.

The “tax wedge” refers to the proportion of tax and social security charges (income tax, employee and employer contributions) relative to the total cost of labour for the employer. In other words, it measures the difference between what the employer pays and what the employee actually receives.

For example, a 40% tax wedge means that for every €100 paid by the employer, only €60 ends up in the employee’s pocket.

Whilst the tax wedge used by the OECD is a good indicator of the burden on labour and allows standardised international comparisons, it also has its limitations:

- it does not take into account tax allowances and tax credits;

- it does not take into account indirect taxes (VAT, local taxes...);

- it varies greatly depending on the family situation: a single person and a single parent do not have the same burden; and

- it ignores the quality of public services funded by these taxes.

In other words, a high tax wedge is not necessarily bad news, if it is accompanied by efficient public services.

Single people taxed more than average in Luxembourg

According to the OECD report, Luxembourg has a tax wedge of 40.3% for a single person on an average income. This is higher than the average for member countries (34.9%) and is mainly due to a significant level of social security contributions.

For a single person on an average annual income, the tax wedge breaks down as follows:

-17.4% income tax;

-10.8% employee contributions; and

-12.1% employer contributions.

Whilst the 12.1% rate may seem high, it is still well below the figures seen in France (26.7%) or Belgium (21.3%). Conversely, Ireland (10%) and Switzerland (6%) apply much lower charges to employers.

On the employee side, contributions reach 3.6% in Ireland and 6% in Switzerland, making these two countries more advantageous for both employers and employees.

A more family-friendly system

The picture changes radically when we look at households with children. A married couple with two children and a single income enjoys a reduced tax wedge of 20.6%, well below the OECD average (25.8%) and half that of a single person.

Better still: a single parent earning 67% of average earnings is taxed at just 12.4%. And even earning 167% of average earnings, this single parent remains below the tax wedge of a single person on average earnings (39.9% compared with 40.3%).

Whilst the tax wedge is a key indicator, it does not accurately reflect the gross-net gap shown on the payslip --which is generally lower. The OECD indicator also includes employer contributions, making it a broader measure of the tax burden on labour.

In concrete terms, for a single employee without children, the real difference between gross and net amounts to 32.1%. So, on an average annual salary of $88,650 in purchasing power parity (PPP)--or €74,296--this employee will receive only $60,149 in net purchasing power parity. Note that the OECD uses the dollar in purchasing power parity here to facilitate international comparisons and reflect differences in the cost of living.

By way of comparison, a married couple where one person earns the average annual salary and the other 67% of the annual average salary receives a total of $117,579 net PPP, out of $148,045 gross PPP.

This article was originally published in .

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