Nicosia, Cyprus. Cyprus’s 2026 personal income tax reform is expected to provide its largest financial gains to upper-middle-income and high-income households, according to a Central Bank of Cyprus working paper. The study found that the measures would raise average disposable incomes and reduce personal income tax liabilities, but benefits would be unevenly distributed.
Study findings
The paper, titled Assessing the Distributional and Fiscal Impacts of Cyprus’s Personal Income Tax Reform, was prepared by Aris Avgousti, Charalambos Michael and Georgiana Photiadou.
It examined how changes to personal income taxation could affect households, public finances and broader economic dynamics. The analysis estimated an annual fiscal cost of around €240 million, broadly in line with official projections.
Reform measures
The study focused on changes to income tax brackets, a new income-dependent tax allowance for dependent children and university students, and an income-dependent allowance for mortgage interest or rental expenses related to primary residences.
The paper excluded the tax incentive for green capital expenditure because of data limitations.
Economic implications
The working paper said major tax reforms can redistribute disposable income among households with different consumption patterns, saving behaviour and financial positions, making their effects relevant from a central bank perspective.
Although tax policy is outside the CBC’s responsibilities, the paper said that understanding income redistribution could help assess potential effects on monetary policy transmission and financial stability. Researchers said tax changes can affect household responses to economic conditions through channels including cash flow effects, asset prices and borrowing pressures.
Methodology
The study used EUROMOD tax-benefit microsimulations combined with confidential household microdata from the EU Statistics on Income and Living Conditions survey and the Household Budget Survey.