Portugal’s Step-By-Step Recent IRS Tax Cut Explained - What You Should Expect

Foreign residents scanning the Portuguese press this week will have noticed a quiet but significant shift in the country’s tax landscape. Portugal’s centre-right government has pushed forward a broad cut to personal-income tax (IRS), promising lighter monthly withholdings and a lump-sum rebate at the end of the summer. Although final approval is still a formality, salaried workers and pensioners are already asking when—and by how much—their pay cheques will change.

A Trim Across Eight Brackets, Felt All the Way Up

For 2025 the executive proposes shaving half a percentage point—or slightly less—from each of the first eight IRS brackets. The entry rate drops to 12.5 percent, while the eighth bracket slips to 44.6 percent; the top marginal rate stays at 48 percent. Because IRS is calculated progressively, households well above the eighth threshold will also feel a modest easing on the slice of income taxed in the lower tiers. The Finance Ministry values the move at about €500 million in annual relief.

Timing the Pay-Packet Boost

The measure cleared committee stage on 10 July with support from the governing PSD, its junior partner CDS-PP and two liberal parties. A final plenary vote is pencilled in for the last parliamentary sitting before the summer recess, after which the bill goes to the president for promulgation and publication. Finance Minister Joaquim Miranda Sarmento told reporters in Brussels that new withholding tables could be issued “in August or September,” applying the lower rates retroactively to January. If the calendar holds, workers may see a one-off correction as early as their September payslip, followed by slimmer monthly deductions from October onward.

What It Means for Foreign Earners

Newcomers often underestimate how large Portuguese withholdings can be. Because employers are instructed to retain an amount close to the year-end liability, a mid-year rate cut quickly fattens take-home pay. The promised retroactive adjustment should reimburse the difference between what was withheld from January to July and what should have been withheld under the lower scale. Employers and pension funds handle the maths automatically; freelancers must wait until spring 2026 when they file their return.

Dollars and Déficits: Can Lisbon Afford It?

Government economists argue the change is budget-neutral, citing buoyant labour-market revenues and a forecasted surplus of 0.3 percent of GDP. Independent watchdogs are less sanguine. The Public Finance Council believes the tax cut will erode receipts enough to flatten the surplus to zero next year and push the balance back into deficit—roughly 1 percent of GDP—by 2026. Technical staff in parliament reach similar conclusions. For now, Brussels shows little alarm because Portugal’s public-debt ratio has been falling faster than most of its euro-area peers.

Political Chess: 2026 Already on the Table

In a late amendment backed by the conservative opposition, lawmakers inserted a pledge to revisit the scale next year. The text obliges the government to trim a further 0.3 percentage points from the second through fifth brackets in the 2026 budget. Left-wing parties voted against, warning the cumulative cuts favour middle- and high-income households while starving public services of revenue. Business lobbies counter that Portugal’s top marginal rate remains one of Europe’s steepest.

Practical Checklist for Expats

1. Verify your withholding code. Make sure your employer knows whether you file jointly or individually; the wrong code could blunt the benefit.

2. Keep August and September payslips. These will show any lump-sum retroactive payment, helpful if you need proof of income for a mortgage or residency renewal.

3. Watch for new tables. The Finance Ministry publishes them in the Diário da República and on the tax authority’s website; payroll departments apply them automatically, but freelancers should adjust advance payments.

4. Mind local tax breaks. Residents under the Non-Habitual Resident (NHR) regime face a flat 20 percent on Portuguese-sourced employment income, so the bracket changes may matter only for foreign-source income not covered by double-tax treaties.

The Bottom Line

Assuming the presidential signature arrives on schedule, most workers will feel a small but noticeable lift in disposable income before the end of the year, with bigger structural questions about fiscal sustainability left for 2026. For foreign professionals who arrived during Portugal’s recent hiring boom, the message is clear: the tax burden is easing—albeit cautiously—and the debate on how far to go next has already begun.