Cyprus’s 2026 personal income tax reform is expected to deliver its biggest financial gains to upper-middle-income and high-income households, according to a new working paper by the Central Bank of Cyprus (CBC).

The study, Assessing the Distributional and Fiscal Impacts of Cyprus’s Personal Income Tax Reform, by economists Aris Avgousti, Charalambos Michael and Georgiana Photiadou, examines how the proposed tax changes could affect household incomes, government finances and the broader economy.

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Higher Earners Benefit Most

The paper concludes that the reform will increase average disposable income and reduce personal income tax liabilities, but the gains will be unevenly distributed across income groups.

Although the Central Bank does not set tax policy, the researchers argue that tax reforms can influence monetary policy by changing household spending, saving and borrowing behaviour.

“By reallocating disposable income across households with different marginal propensities to consume, different savings behaviour and different exposure to interest rate movements, the reform may influence the strength and composition of monetary policy transmission,”

the paper said.

How The Reform Was Assessed

The analysis used EUROMOD tax-benefit microsimulations alongside confidential household data from the EU Statistics on Income and Living Conditions (EU-SILC) and the Household Budget Survey.

It assessed changes to income tax brackets, a new income-dependent allowance for dependent children and university students, and an income-dependent allowance for mortgage interest or rental expenses linked to primary residences. A proposed tax incentive for green capital expenditure was excluded because of data limitations.

Limited Relief For Lower-Income Households

Many lower-income households are expected to see little or no direct benefit because their taxable income was already below the previous threshold.

In 2022, 43% of taxpayers reported taxable income below the pre-reform threshold of €19,500. Households in the lowest income decile are projected to gain an average of just €5 per year, compared with €1,057 for those in the highest decile.

The largest gains are concentrated among upper-middle-income and high-income households, while middle-income groups receive more modest benefits. As a share of disposable income, gains peak at 2.9% in the ninth income decile before easing to 2% in the highest decile.

Fiscal Cost And Trade-Offs

The researchers estimate the reform will reduce government revenue by around €240 million annually, broadly in line with official projections, while reducing the number of taxpayers with positive personal income tax liabilities by around 22%.

Although the paper says the fiscal cost appears manageable given Cyprus’s budget position, it argues that alternative approaches could have reduced the concentration of benefits among higher-income households while preserving more fiscal space for social cohesion measures and productivity-enhancing investment.

Modest Economic Impact

The reform is expected to support private consumption and modestly increase consumption tax revenues, producing a limited boost to economic growth. However, the impact is likely to be constrained because a significant share of additional spending will be absorbed by imports rather than domestic production.

The paper also notes that Cyprus’s fiscal surpluses provide an opportunity to invest in productivity, public services and the green and digital transition.

Relief Comes With Distributional Trade-Offs

The authors conclude that while the reform increases disposable income and lowers personal income tax liabilities, it does little to improve income distribution.

“Achieving meaningful distributional improvements would likely require strengthening the social safety net and deploying more targeted fiscal support,”

the researchers said.

They add that higher disposable incomes should leave households better off overall, while changes in income distribution could also affect borrowing, housing demand and the transmission of monetary policy.