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Pay your team in Portugal
Setting up payroll in Portugal
Income tax and social security in Portugal
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Although running payroll in Portugal is not as complex as in other European countries such as France or Germany, employers still need to get used to the local laws and regulations to understand the necessary requirements. Keeping up with regulatory changes is another challenge employers have to face.
With its 2022 State Budget, the Portuguese government has introduced several legal changes which will also impact the payroll processing. Foreign employers looking to hire staff and process payroll in Portugal should therefore pay close attention to the current compliance requirements.
There are several requirements employers have to fulfill before they can start processing payroll in Portugal. Although it is not mandatory to set up a local legal entity, employers have to register with the local social security and tax authorities. After registration, the Portuguese Tax and Customs Authority (Autoridade Tributária e Aduaneira) issues a taxpayer number. Employees should also be registered with the tax office as well as with Social Security (Segurança Social).
New hires should be registered with the social security bodies at least 24 hours before the official start of their employment contract. The registration is usually done online - unless the employee has never worked in Portugal before and therefore has no personal social security number.
In addition to registering with the tax and social security body, employers are obligated to take out occupational accident insurance to cover their employees - this must be done before the first working day - as well as sign up for the national compensation fund. Setting up a local bank account is necessary for foreign businesses that want to incorporate in Portugal.
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The 2022 State Budget has increased the number of tax bands from 7 to 9 as well as lowered the income threshold for the top tax rate which is now EUR 75,009 instead of EUR 80,882. Social security rates remained unchanged in 2022.
Portugal operates a progressive income tax system. There are 9 different tax rates which apply to income earned through employment. The lowest rate is 14.5%. Thereafter, income tax rates increase until they reach a 48% top rate. An additional 2.5% surcharge applies to income exceeding EUR 80,000 - increases to 5% once the income exceeds EUR 250,000.
Taxable income includes the employee’s basic salary as well as bonuses, allowances, benefits in kind and other payments made to the employee by the employer. Employment expenses are deductible and there are several tax credits available for employees. Those include tax credits for dependent family members, health expenses and more.
Under the Portuguese tax system, young taxpayers aged between 18 and 26 are partially exempt from paying income tax (known as IRS Jovem) if they are not dependent and if their income does not exceed EUR 25,075 per year. However, the tax exemption is restricted to 5 years (was 3 years before 2022) and the percentage of tax-exempt income reduces gradually from 30% in the first two year to 10% in the last year.
Portuguese residents are taxed on their worldwide income. Non-residents only pay tax on income derived from Portuguese sources. A flat tax rate of 25% applies to the latter. Residence for tax purposes is determined by the 183-day rule or by whether the individual has an official residence in the country or not.
The country has a special tax regime for former residents wishing to return to Portugal after a period of absence of 3 years. Individuals fulfilling the necessary criteria only pay income tax on half their employment income. The government has extended the tax relief for former residents until 2023.
2022 Tax Bands
Corresponding Tax Rates
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.
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.
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.
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.
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.
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.
Employees in Portugal are entitled to various benefits. These include:
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%
For more information on employee benefits and other employment requirements in Portugal (including severance pay and termination procedures), check out our Global Hiring Guide.
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).
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.
Learn about tax reporting, compensation laws, registration requirements and more in our free Payroll Guide for Portugal.
This country guide is for informational purposes only and should not be construed as legal advice. The content of this guide contains general information, and although we update this guide regularly, it may not reflect current legal developments. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this country guide.
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