Cyprus Income Tax 2026: Key Guide for Employers & Compliance

Starting 1st January 2026, Cyprus will implement major changes to its Personal Income Tax (PIT) regime. Approved by the Cyprus Parliament on 22nd December 2025, these amendments impact payroll withholding, employee taxation, and personal deductions for resident individuals.

For companies, compliance leaders, and payroll teams, understanding these reforms is critical to ensure compliance, optimize tax planning, and support employees effectively.

1. Higher Tax-Free Income and Revised Tax Slabs

The tax-free income threshold is increasing from €19,500 to €22,000, offering immediate relief to employees, particularly those in low- and middle-income brackets.

The updated 2026 PIT slabs are:

• €0 – €22,000: 0%
• €22,001 – €32,000: 20%
• €32,001 – €42,000: 25%
• €42,001 – €72,000: 30%
• Over €72,000: 35%

Employers must update payroll systems and withholding calculations to reflect these new thresholds.

2. Updated Rules for Insurance and Pension Deductions

Article 14 of the Income Tax Law has been revised, allowing employees to claim deductions for:

• Life insurance premiums (including disability cover), capped at 7% of the sum assured
• Contributions to statutory and approved funds, e.g., Social Insurance Fund and Widows’ & Orphans’ Fund
• Contributions to approved pension or welfare funds, capped at 10% of total income
• Premiums for approved health insurance plans, capped at 2% of total income
• Contributions to the General Health System (GHS)

Total deductions under Article 14 are limited to 20% of taxable income. Payroll and compliance teams must ensure proper documentation and reporting for these deductions.

3. New Personal Deductions for Resident Individuals

Article 14B introduces additional deductions based on family composition and annual income:

• €40,000 for single individuals
• €100,000 for families with 1–2 children
• €150,000 for families with 3–4 children
• €200,000 for families with 5 or more children

Dependent children allowances:

• €1,000 for the first child
• €1,250 for the second child
• €1,500 for the third and additional children

Single-parent households benefit from double amounts, offering significant support for diverse family structures. Employers should prepare to communicate these allowances and assist in accurate payroll implementation.

4. Relief for Housing Costs

Employees can claim up to €2,000 per year for:

• Interest on loans used to purchase or construct a principal residence
• Rent paid for a principal residence

This deduction applies per individual, and payroll systems must accommodate these adjustments to ensure correct withholding.

5. Incentives for Green Home Upgrades

To promote sustainability, the law allows a €1,000 deduction for environmentally friendly home improvements, including photovoltaic systems and electric vehicle-related upgrades. This deduction can be spread over up to five years.

6. Home Insurance Against Natural Disasters

A €500 deduction per individual is available for residential property insurance covering natural disasters such as fire, earthquakes, and floods. Payroll teams must ensure accurate recording if reimbursed or included in taxable benefits.

7. Tax Treatment for Lump-Sum Gratuity Payments

Lump-sum gratuity payments at employment start or termination are now taxed separately under Article 20F:

• Amounts exceeding €200,000 are taxed at a flat 20% rate
• These payments are not combined with other taxable income

Employers must handle these payments carefully to maintain compliance and avoid misreporting.

What These Changes Mean for Employers and Compliance Leaders

The 2026 Cyprus Personal Income Tax reforms are more than a simple adjustment—they represent a strategic responsibility for employers, payroll teams, and compliance leaders. Key action points include:

• Payroll Updates: Ensure all payroll systems reflect new tax slabs, tax-free thresholds, and deduction limits.
• Employee Guidance: Communicate changes effectively, particularly family-based allowances, housing deductions, and sustainability incentives.
• Compliance and Reporting: Accurately report deductions, gratuity payments, and contributions to relevant authorities.
• Strategic Tax Planning: Leverage these reforms to optimize corporate tax strategy, improve employee benefits, and ensure regulatory compliance.

Proactive planning will minimize risk, strengthen compliance, and allow organizations to maximize employee satisfaction under the new PIT framework.

In short: The 2026 PIT reforms introduce meaningful tax reliefs, enhanced family-based deductions, and incentives for home ownership and sustainability. Employers, payroll teams, and individuals should review these changes carefully to ensure compliance and optimise tax planning.