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Personal Income Tax (IRS) in Portugal: Changes to withholding tax
19 Jan 2023 . By Roberto Castro Mendonça - Lawyer

Personal Income Tax (IRS) in Portugal: Changes to withholding tax

The current withholding tax model on employment and pension income has a long tradition in the Portuguese tax system and represents an advance payment of the final tax due by the taxpayer.

In effect, the currently applicable withholding tax model is based on a concept of a "single" progressive rate and, by applying it to the total income of the month, results in taxpayers having to wait for the IRS refund to materialise the concrete tax situation.


Living in Portugal - Our updated guide


What is the personal income tax in Portugal?

In Portugal, the Personal Income Tax (IRS) is levied on the income of individuals and is broken down into six categories.

Residents in Portugal are taxed on all income obtained (in Portugal and abroad), whilst non-residents are taxed on income obtained in Portugal (according to the IRS categories).

A special, more attractive regime for Non-habitual residents (NHR) also exists.

What are the personal income tax categories in Portugal?

As the IRS is a personal income tax, it distinguishes the origin of the income according to the source: employment contract, independent work, pensions, capital investments, rents, or other sources. Each of these sources is taxed independently.

For IRS calculation purposes, there are six categories of income:

  • Category A - Employment income
  • Category B - Business and professional income
  • Category E - Capital income
  • Category F - Real estate income
  • Category G - Capital gains (capital gains and other asset increases)
  • Category H - Pensions

Personal income tax rates in Portugal for 2023

These are the rates in force in mainland Portugal:

Taxable Income (€)

Standard Rate (%)

Average Rate (%)

up to 7.479



from 7,479 to 11,284



from 11,284 to 15,992



from 15,992 to 20,700



from 20,700 to 26,355



from 26,355 to 38,632



from 38,632 to 50,483



from 50,483 to 78,834



over 75.009



The amount of taxable income, when higher than €7,479, is divided into two parts, under the following terms: one, equal to the limit of the highest tax bracket, to which the average rate corresponding to that bracket is applied; another, equal to the excess, to which the standard rate for the immediately higher tax bracket is applied.

The Autonomous Region of Madeira benefits from a reduction in IRS rates.

Withholding tax - what is it?

The payment of the IRS is made through a tax substitution mechanism, foreseen in article 20 of the Portuguese General Tax Law.

Withholding at source is the mechanism by which employees have part of their income "withheld" and transferred to the Portuguese State as if it were a monthly payment of the IRS.

The calculation of the monthly amount to be withheld results from the income obtained by the worker and varies according to some factors such as their physical condition, family situation, and location (Mainland Portugal, Madeira, or the Azores.

Withholding tax is levied on income subject to progressive rates.


Withholding tax in Portugal - what changes in 2023?

The Portuguese State Budget for 2023 will introduce a new withholding tax model, aiming at introducing closer proximity between the monthly withholding tax and the calculation of the amount of IRS to be paid each year.

Finding a balance in the withholding tax model has always proved to be particularly complex, especially considering the characteristics of the IRS, as a subjective tax that allows differentiated deductions and tax benefits for taxpayers.

In this sense, the legislator's option is to migrate from a single rate model to a marginal rate model, with the practical effect of increasing taxpayers' net monthly income. As we are dealing with a mere revision of the withholding tax technique and not with a reduction in tax rates, this increase in net monthly income should result in a substantial decrease in the annual reimbursement or even in the payment of tax when filing the IRS declaration.

The new model was recently detailed in Order no. 14043-B/2022, of 5 December (applicable only in mainland Portugal), which will come into force on 1 July 2023.

 The current single-rate model will remain in force in the first half of the year.


This new model only comes into force on 1 July 2023


The new mechanism harmonises the IRS withholdings with the general table of annual IRS tax brackets and, consequently, avoids situations of regressivity (situations in which an increase in the gross monthly salary leads to a decrease in the net monthly salary). The monthly deduction at source will be determined by applying a marginal rate on the monthly income and, subsequently, the deduction of a portion to be deducted. The application of an additional deduction per dependent of a fixed value (which replaces the current reduction of rates per number of dependents) will also be considered.

Despite only coming into force on the 1st of July 2023, the complexity of the new model forces paying entities to make an additional effort to adapt their systems during the first half of the year.

Finally, we note the commitment made by the Government to extend this change of tax technique to business and professional income (category B) in the future.


Living in Portugal - Our updated guide