Payroll Services
in Portugal

Income Tax and Social Security in Portugal:

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The 2022 State Budget in Portugal introduced significant changes to income tax and social security regulations. One key change was the increase in tax bands from 7 to 9, along with a reduction in the income threshold for the top tax rate, now set at EUR 75,009 (previously EUR 80,882). Social security rates remained unchanged in 2022.

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Income Tax in Portugal

Portugal follows a progressive income tax system with 9 tax bands for income earned through employment. The lowest rate starts at 14.5%, gradually increasing to a top rate of 48%. Additionally, an extra 2.5% surcharge is applied to income exceeding EUR 80,000, increasing to 5% for income over EUR 250,000.

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Taxable income includes basic salary, bonuses, allowances, benefits in kind, and other payments from the employer. Employees can benefit from deductions on employment expenses and tax credits, including for dependent family members and health expenses.

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Special Tax Relief for Young Taxpayers

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Portugal offers a tax exemption under the IRS Jovem scheme for young taxpayers between the ages of 18 and 26. If they are not dependents and their annual income does not exceed EUR 25,075, they may be partially exempt from income tax. This tax relief lasts for 5 years (extended from 3 years in 2022), with the percentage of tax-exempt income gradually decreasing from 30% in the first two years to 10% in the final year.

Taxation for Residents and Non-Residents

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Portuguese residents are taxed on their worldwide income, while non-residents are only taxed on income derived from Portuguese sources, subject to a flat rate of 25%. Tax residency is determined by the 183-day rule or whether the individual has an official residence in Portugal.

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Tax Benefits for Former Residents

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Portugal also offers a special tax regime for former residents returning to Portugal after a period of absence of at least 3 years. Those who meet the criteria will only pay income tax on half of their employment income. The government has extended this tax relief for former residents until 2023.

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Tax withholding and reporting

 

Employers are obligated to withhold income tax from employee salaries on a monthly basis and submit the withheld amounts to the tax office until the 20th of the following month. Withheld income tax needs to be declared once a month via the so-called Declaração Mensal de Remunerações (short: DMR). The declaration must be filed online until the 10th of the following month. 

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At the end of each year, employers further have to prepare an annual tax declaration informing the authorities about the amount of income tax withheld and paid during the previous year. The deadline is 20 January. 

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The tax year runs from 1 January to 31 December. Individuals have to file a personal tax return by 30 June. Married couples can decide to file a joint tax return. 

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Social security contributions

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Social security contributions must be made on a monthly basis. Employees are required to pay 11% of their monthly salary while the employer contributes 23.75% on behalf of the employee. The contributions cover several social security benefits, including unemployment, family, pension and sickness benefits.

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It is the employer’s responsibility to withhold the employee’s share of the contributions and pay them to Social Security together with their own contributions. Payments are due by the 20th of the month following the pay period. A separate social security DMR must be filed 10 days earlier, i.e. by the 10th. As for the tax DMR, the filing is done electronically. There further is an additional annual social security statement (Relatório Único) which should also include information on employee training, safety measures at work and more and which usually needs to be filed around April - exact due date varies. 

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In addition to the standard social security contribution, employers are further required to pay 1% of the employee’s monthly salary into the Work Compensation Fund - due by the 20th of the month - as well as to take out accident insurance for their employees. The contribution rates for the latter vary depending on the company’s business activity and the work risks involved. In total, employers pay around 26% of the employee’s salary in social security, insurance and wage guarantee fund contributions.

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Employment obligations

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Employees in Portugal are entitled to various benefits. These include:

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• Annual leave and public holidays: 22 working days, 13 public holidays 

• Maternity leave/Initial parental leave: both parents together are entitled to up to 180 days of initial parental leave; for the mother leave can start up to 30 days before delivery; 6 weeks after giving birth are mandatory; if only the mother claims the leave, she can either take 120 days on full pay or 150 days paid at a rate of 80%

• Paternity leave: 20 days of fully paid leave are exclusively reserved for the father, additional 5 days are optional

• Extended parental leave: both parents may each take another 3 months of parental leave - only partially paid

• Sick leave: 3 days waiting period before sickness benefits are paid by Social Security - limited to 1,095 days; rates vary between 55% and 100%

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Compensation

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As of January 2022, the national minimum wage in Portugal is fixed at EUR 705 per month (up from EUR 665 in 2021). The government plans to raise minimum pay to EUR 750 by 2023. Overtime work must be remunerated at higher rates: at least 125% of normal wages for the first hour worked overtime and 137.5% for subsequent hours.

On rest days or public holidays, overtime pay is 150% of the normal hourly standard. On top of their normal salary, employees are entitled to an annual Christmas bonus (to be paid out until 15 December) as well as to an annual holiday bonus (to be paid out before the employee’s holiday period).

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Payroll requirements

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Payroll in Portugal is processed on a monthly basis. Payments to employees should be made no later than the last day of the month. It is mandatory to provide employees with a payslip at the end of each pay period. The latter can either be issued in paper form or electronically and should detail the different parts of the employee’s remuneration as well as the tax and social security deductions made. The mandatory file keeping period for payroll records is 5 years.