Income taxes in Portugal to be reduced

• 15 January, 26

Portugal is set to reduce personal income tax (IRS) starting in 2026. To implement the new tax cuts, the government must update the withholding tax tables applied to employees and pensioners. While the majority of taxpayers are expected to benefit from lower taxes, the exact monthly withholding amounts for salaries and pensions have not yet been officially announced.

2026 State Budget Drives Income Tax Reform

The tax reduction stems from the 2026 State Budget (OE2026), which will come into force on January 1, 2026. The budget introduces three key amendments to the Personal Income Tax Code, with the objective of increasing the real disposable income of workers and retirees.

Multiple Tax Adjustments Introduced Simultaneously

Under the 2026 State Budget, tax rates for the second to fifth income brackets will be reduced by 0.3 percentage points. At the same time, the upper limits of all nine income brackets will be increased by 3.51% compared to 2025, allowing each tax rate to apply to higher income levels. In addition, the minimum subsistence threshold will be raised, expanding tax relief for lower-income taxpayers.

Income Tax Remains Calculated on an Annual Basis

Personal income tax in Portugal continues to be assessed annually. Tax authorities will calculate the final tax due after the end of the 2026 fiscal year, based on all income earned between January 1 and December 31, applying the new tax rates and updated income brackets.

New Withholding Tax Tables to Be Published in January

To ensure that monthly tax deductions reflect the new tax cuts, the government must revise the withholding tax tables for wages and pensions. A source from the Ministry of Finance confirmed to Lusa News Agency that the updated tables will be published in January. These will then be applied by all paying entities, including private companies, public institutions, municipalities, private social solidarity institutions (IPSS), social security bodies, and the national pension fund.

Uncertainty Over Application to January Salaries and Pensions

It is still unclear whether the new withholding tables will be applied in time for January salary and pension payments. Traditionally, when updated tables are published after monthly payments have already been processed, adjustments are made in subsequent months. The exact implementation method will depend on the final government decree.

Tax Rates Reduced for the Second to Fifth Income Brackets

According to the 2026 budget proposal, the tax rate for the second income bracket will fall to 15.7%, the third to 21.2%, the fourth to 24.1%, and the fifth to 31.1%. Although only four income brackets see direct rate reductions, the reform benefits all taxpayers through the progressive tax system.

All Income Levels Benefit from the Reform

Because personal income tax in Portugal is progressive, taxpayers earning above the fifth income bracket will also benefit from the lower rates applied to income portions within the second to fifth brackets, resulting in higher overall net income.

Minimum Subsistence Threshold Increased to €12,880

The minimum subsistence reference value will rise to €12,880 in 2026. This mechanism ensures that taxpayers earning up to the national minimum wage for 2026, set at €920 gross per month, will be fully exempt from income tax, maintaining the same protection granted to minimum wage earners in 2025.

First Income Bracket Also Sees Effective Tax Relief

Due to the way the minimum subsistence threshold is calculated, taxpayers earning slightly above €920 per month will also benefit from partial tax exemption. As a result, even though the tax rate for the first income bracket remains unchanged, affected taxpayers will still experience a reduction in their overall tax burden.

Consultancy Forecasts Net Income Growth for All Taxpayers

According to simulation analyses carried out by PwC when the government submitted the 2026 State Budget proposal on October 9, the tax reform is expected to increase net income across all income levels, providing a positive boost to household purchasing power and overall consumption.

Cre: The Portugal News