Flash News NA 2025/05/14
Factors Influencing Income Tax Withholding Rates for Employees in Portugal
Income tax withholding rates applicable to employees in Portugal depend on a range of legal and personal factors that must be carefully considered by employers. This article outlines the key elements that influence these rates.
Withholding tax is a form of advance payment of personal income tax made monthly by employers. The rate to be applied is determined by several factors that directly affect the employee’s net pay.
1. Gross Monthly Income
The most influential factor is the employee’s gross monthly income. The Portuguese Tax Authority publishes annual withholding tables with different rates for different income brackets.
2. Family Situation
Marital status and the number of dependants significantly impact the applicable rate. For example, a married employee with children may face a lower withholding rate than a single employee with no dependants.
3. Individual or Joint Taxation
Married couples can choose between joint or separate taxation, which also affects the applicable rate.
4. IRS Regime (Resident vs Non-Resident)
Non-resident employees in Portugal are subject to a special tax regime, often with a flat rate.
5. Age – Young IRS Scheme
Young people up to the age of 26 (or up to 30 in the case of a PhD), under the rules applicable until 2024, who take up their first job after completing their studies, may benefit from the Young IRS scheme, which grants a partial exemption from withholding tax for a period of 5 years, within limits defined by law. From 2025 onwards, the scheme will apply to individuals up to the age of 35, regardless of their level of education, for a period of 10 years. To calculate those 10 years, all years in which the taxpayer submitted Model 3 tax returns as an income earner are considered.
6. Other Relevant Factors
Child support obligations, disabilities, and multiple sources of income can also affect the withholding rate.
Conclusion
Incorrect application of withholding rates can lead to future tax complications for both employees and employers. It is therefore crucial to ensure all relevant factors are accurately considered during payroll processing.
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