Portugal’s New €920 Minimum Wage to Be Paid Tax-Free from January 2026

The Government’s draft Budget has quietly slipped one of the most talked-about promises into its hundreds of pages: from January 2026, workers earning the future minimum wage of €920 a month will see zero income tax on their payslip. Behind that headline lurks a complex formula, moderate enthusiasm from unions, and an €85 M cost that Lisbon says it can absorb.

What changes for your payslip in 2026?

If Parliament signs off on the proposal, the minimum-existence threshold—the income the State must leave untouched—jumps to €12,880 a year. Because most Portuguese employees are paid over 14 months, that figure neatly matches a monthly salary of €920. Anyone earning at or below that line will be shielded from IRS withholding, meaning their gross and net wages will finally coincide. For people on slightly higher earnings, the first slice of income up to €12,880 is still protected, cushioning the impact of the updated but still progressive IRS brackets.

Why the minimum-existence benchmark matters

The concept, known in Portuguese tax jargon as mínimo de existência, is designed to safeguard a basic living standard. By law, it must be the larger of two numbers: 14 times the legal minimum wage or 1.5 × 14 × the Social Support Index (IAS). For 2026, Finance Ministry technicians calculate that the IAS-based formula may in fact spit out a value marginally above €12,880, yet the Budget sticks to the round figure linked to the minimum wage. That decision, tax lawyers note, gives the Cabinet some wiggle room to update the benchmark mid-year should inflation jump or social partners demand it.

Government’s arithmetic – and the hidden caveats

While the political soundbite is tax relief for the low-paid, the spreadsheets reveal a more modest story. The Ministry pegs the gross cost of the measure at €85 M, arguing that higher consumption will claw back part of the shortfall through VAT receipts. Civil servants earning the new base salary of €934.99 will, however, still pay IRS on roughly €15 a month, because their fourteen-month pay packet breaches the threshold. The Budget also cancels 0.3 percentage points from the 2nd to 5th IRS brackets and indexes the full scale upward by 3.51 %, but those tweaks do little to help the lowest earners, whose entire liability is already wiped out.

Reaction from unions and employers: a rare moment of calm

For once, the proposal has not triggered street protests. The figures honour the Tripartite Agreement 2025-2028 hammered out last year, which plotted annual €50 increments leading to a €1,100 minimum wage by 2029. Union federations still call the rise ‘modest’ against Lisbon’s mounting rent and grocery prices, yet they accept the tax exemption as a concrete gain. Employer confederations, facing energy and credit-cost pressures, appear relieved the Cabinet has not strayed beyond the agreed €920. Labour Minister Maria do Rosário Palma Ramalho has left the door ajar for revisions, but only if fresh consensus emerges at the Social Concertation table.

How does Portugal stack up against Europe?

Even with the bump, Portugal remains in the EU cluster whose minimum wages sit below €1,000. Neighbours like Spain and Slovenia are already past that line, while France and Germany pay over €1,500. Where Portugal differentiates itself is by making the full minimum wage tax-free, a policy only a handful of member-states mirror. The overall tax burden, at 38 % of GDP, stays lower than the euro-area average, although critics argue that high social-security contributions dilute the benefit for employers hiring low-skilled staff.

The budgetary price tag

Funding the IRS giveaway is easier this year thanks to still-solid tourism revenue and a rebound in corporate profits. The Government insists the measure is self-financing in the medium run because families with extra disposable income are likely to spend rather than save. Fiscal hawks counter that another external shock—think oil prices or interest-rate hikes—could turn the €85 M into another item on the public-debt pile. For now, the Council of Public Finances has given a cautious green light, warning that any deviation in growth forecasts will require compensatory moves.

What’s next in the political calendar

Parliament begins detailed scrutiny later this month, with the final vote slated for 22 November. Amendments may tweak the fine print, yet major parties signal little appetite to touch the €12,880 threshold. If the schedule holds, payslips issued in late January 2026 will be the first to reflect the change. Employers are already updating payroll software, and tax advisers urge workers to check that the withholding table used by HR departments is version 2026. After years of incremental hikes, the IRS-free minimum wage represents a symbolic milestone—and, for hundreds of thousands of households, a few extra euros to face Portugal’s rising cost of living.