Taxing Wages 2018

Portugal

Abstract

This chapter includes data on the income taxes paid by workers, their social security contributions, the family benefits they receive in the form of cash transfers as well as the social security contributions and payroll taxes paid by their employers. Results reported include the marginal and average tax burden for eight different family types.

Methodological information is available for personal income tax systems, compulsory social security contributions to schemes operated within the government sector, universal cash transfers as well as recent changes in the tax/benefit system. The methodology also includes the parameter values and tax equations underlying the data.

 

 

The national currency is the Euro (EUR). In 2017, EUR 0.89 equalled USD 1. The Secretariat has estimated that in that same year the average worker earned EUR 17 993 (Secretariat estimate).

1. Personal income tax system

1.1. Taxes levied by central government

1.1.1. Tax unit

The standard rule is separate taxation. However, families may opt for joint taxation. Income includes the income of any dependent children. Tax is computed on aggregate net income in the various categories of income, i.e. after the deductions specific to each category and standard and non-standard reliefs.

1.1.2. Standard and non-standard reliefs and tax credits

1.1.2.1. Standard reliefs

Standard deduction of EUR 4 104. If compulsory contributions to social protection schemes and statutory sub-schemes for health care exceed that limit, the deduction will equal the amount of those contributions.

1.1.2.2. Non-standard reliefs

For income received from 1 January 1999 onwards, the majority of the standard reliefs have been replaced by tax credits (see Section 1.1.4.).

Non-standard reliefs still in effect:

A deduction is provided for the portion of trade union dues not constituting consideration for benefits in the realm of health care, education, assistance for the elderly, housing, insurance or social security, up to 1% of the taxpayer’s gross income, increased by 50%. These dues are not taken into account in the calculations underlying this Report.

1.1.3. Social security contributions

Social security contributions are totally deductible if they exceed EUR 4 104.00 per taxpayer, in which case the deduction for the contributions replaces the standard earned income deduction (see Section 1.1.2.1.).

1.1.4. Tax credits

Basic credits

• EUR 600 for each dependent child. This tax credit is increased by EUR 125 for dependent children whose age does not exceed 3 years old.

• EUR 525 for each ascendant whose income does not exceed the minimum pension benefit. When there is only one ascendant, the tax credit increases by EUR 110.

Other tax credits

• 35% of household general expenses up to a limit of EUR 250, per taxpayer; this limit is increased to 45% and EUR 335, respectively, for single parents.

• Non-reimbursed health care costs, not covered by Social Security: 15% of health care costs, with a limit of EUR 1 000.

• Expenditures for educating the taxpayer or the taxpayer’s dependants: 30% of outlays, up to EUR 800.

• Costs for sanatoria or retirement homes for taxpayers, their ascendants and collaterals up to the third degree whose income does not exceed the national minimum wage: 25% of expenses up to EUR 403.75.

• 15% of the amount spent (up to EUR 296.00) on interest regarding the acquisition, construction or improvement of the taxpayer’s primary residence, or leasing contracts (applicable to contracts up to 31/12/2011); and 15% of the amount spent (up to EUR 502.00) on rents paid by a tenant for his permanent residence under an agreement typified by the law. These limits are also increased for taxpayers in the first tax rate bracket and for taxpayers with income above the first rate bracket upper limit and below EUR 30 000, according to the formula below.

  

• 20% of alimony payments compulsory under court order or court-approved agreement.

• 30% of education expenditures and 25% of life insurance premiums, up to a limit of 15% of the tax liability, for handicapped taxpayers or dependents.

• 15% of VAT paid for certain services (restaurants, lodging, hairdressers, and auto-repair) up to a limit of EUR 250. This benefit is not included on the limits referred to on the next page.

Tax credits from tax benefits

• Individual Retirement Savings Plans (PPRs): 20% of amounts invested, for unmarried taxpayers or for each spouse, up to:

  • EUR 400 for taxpayers under 35;

  • EUR 350 for taxpayers over 35 and under 50;

  • EUR 300 for taxpayers over 50.

• Social Security Individual Accounts: 20% of amounts invested, for unmarried taxpayers or for each spouse, up to a limit of EUR 350.

Donations granted on the conditions stated in the statutes governing charities (grants to central, regional or local government, special “social solidarity institutions”, museums, libraries, schools, institutes, educational or research associations, public administrative bodies, etc.): 25% of donations, limited in certain cases to 15% of the donor’s tax liability. However the total of tax credits related to health care costs, education and training, alimony, retirement homes, VAT paid, house expenses and tax benefits cannot exceed the values of the following amounts:

 

Taxable income (EUR) (R)	Limit
Up to 7 091	Without limit
Between 7 091 and 80 640
Over 80 640	EUR 1 000

Limits are increased in 5% for each dependent.

1.1.5. Family status – determination of taxable income

The default status is individual taxation. Couples can opt for joint taxation based on the income-splitting system as it is described below. In the Taxing Wages calculations, the most favourable system is chosen.

1.1.6. Tax rate schedule (applicable to 2016 income)

 

Taxable income (EUR) (R)	Marginal tax rate (%) (T)	Amount to deduct (EUR) (K)
Up to 7 091	14.50	-
Over 7 035 up to 20 261	28.50	992.74
Over 20 100 up to 40 522	37.00	2 714.93
Over 40 200 up to 80 640	45.00	5 956.69
Over 80 640	48.00	8 875.89

In the case of taxpayers whose income stems primarily from dependent employment (earned income), disposable income after application of the tax rates to taxable income may not be less than, EUR 8 500.00 per taxpayer in 2017.

For residents in the Autonomous Regions of the Azores, reduced tax rates are applicable. Tax calculation formula (I = Income tax due):

Unmarried taxpayers: I = R × T – K – C

Married taxpayers can opt for joint taxation based on the income splitting method (with one or two earned incomes/see Section 1.15):

• I = {[ (R : 2) × T – K] × 2 } – C

Where:

R = Taxable income, after deduction of standard and non-standard reliefs (see Sections 1.12)

T = Tax rate corresponding to the taxable income bracket

K = Amount to be deducted from each bracket

C = Tax credits (see Section 1.14)

Surtax:

An additional solidarity tax rate surtax was introduced by the 2012 State Budget and is applicable on highest income bracket. The surtax tax rate is now 2.5% applicable to taxable income between EUR 80 000 and EUR 250 000 and 5% for taxable income above EUR 250 000.

Furthermore, a 3.5% surtax was reintroduced, for taxable income above the annual national minimum wage (EUR 6 790), with a tax credit of 2.5% of the annual minimum wage per dependent (EUR 169.75).

Furthermore, the surtax created in 2011, and reintroduced in 2013, 2014 and 2015 has been made progressive, aiming at its elimination in 2017, according to the table below, with a tax credit of 2.5% of the annual minimum wage per dependent (EUR 194.95).

 

Taxable income (EUR) (R)	Tax rate (%) (T)
Up to 20 261	0
Over 20 261 up to 40 522	0.88
Over 40 522 up to 80 640	2.75
Over 80 640	3.21

1.1.7. Special family situations

1.1.7.1. Handicapped taxpayer/spouse, with a disability rating of 60% or more:

A tax credit corresponding to 4 times the 2010 minimum wage (EUR 1 900) is granted for each taxpayer or spouse.

1.1.7.2. Handicapped dependent children, with a disability rating of 60% or more:

A tax credit corresponding to 1.5 times the social benefits index (EUR 712.50) is granted for each dependent child.

1.1.7.3. Handicapped taxpayer/spouse or dependent children, with a disability rating of 90% or more:

An additional tax credit corresponding to 4 times the 2010 minimum wage (EUR 1 900) is granted for each taxpayer or spouse or dependent child.

1.1.8. Non liable income

• Lawfully granted family allowances;

• Living expenses per diem, up to the limits established for national civil servants;

• Meal allowances, up to the amount established for national civil servants, increased by 20% or 60% in the event of a meal allowance in the form of meal vouchers.

2. Compulsory social security contributions to schemes operated within the government sector

Rates and ceilings: social security contributions are levied on gross pay and are not subject to any ceiling.

2.1. Employee contributions

As a rule, the rate of employee contributions is 11% of gross pay, with no ceiling.

2.2. Employer contributions

The employer’s rate of social security contributions is 23.75% of gross pay, with no ceiling.

2.3. Areas of social protection

• Health (sickness, disability, work accidents, work-related illness);

• Old age, survival;

• Maternity;

• Family (family allowances);

• Unemployment.

3. Universal cash benefits

3.1. Benefits for dependent children

The basic principle is to grant higher monthly social benefits to lower-income households.

There are six different levels of monthly allowances for dependent children, depending on the family’s reference income. This reference income is determined by dividing the family’s annual gross income, including vacation and Christmas allowances, by the number of dependent children plus one:

• Level 1: Families whose reference income is under 50% of 14 times the reference value (i.e. under EUR 2 949.24);

• Level 2: Families whose reference income is over 50% and under 100 per cent of 14 times the reference value( i.e. over EUR 2 949.24 and under EUR 5 898.48);

• Level 3: Families whose reference income is over 100% and under 150% of 14 times the reference value (i.e. over EUR 5 898.48 and under EUR 8 847.72);

• Level 4: Families whose reference income is over 150% (i.e. over EUR 8 847.72).

Each level is also divided according to the age of the dependent child. Benefits are higher during the first 12 months of a child’s life.

Monthly social benefits per child are as follows:

Up to 30 June 2017

 

	Child under 12 months	Child over 12 months old	Additional benefit per child over 12 months and under 36 months in a family with 2 children	Additional benefit per child over 12 months and under 36 months in a family with 3 or more children	Child over 36 months old
Level 1	146.42	54.90	36.60	73.20	36.60
Level 2	120.86	45.33	30.22	60.44	30.22
Level 3	95.08	38.64	27.35	54.69	27.35
Level 4	9.46	9.46	9.46	9.46	0

From 1 July 2017

 

	Child under 12 months	Child over 12 months old	Additional benefit per child over 12 months and under 36 months in a family with 2 children	Additional benefit per child over 12 months and under 36 months in a family with 3 or more children	Child over 36 months old
Level 1	146.42	73.21	36.60	73.20	36.60
Level 2	120.86	60.43	30.22	60.44	30.22
Level 3	95.08	49.93	27.35	54.69	27.35
Level 4	18.91	18.91	18.91	18.91	0

Monthly social benefits per child in a single-parent family are increased by 35%.

In September, families with dependent school children aged between 6 and 16 years receiving child benefits in level 1 receive an additional amount equal to the regular monthly benefit.

An amount equal to the cash benefits for dependent children under 12 months is attributed for each unborn child after the first month following that of the 13th week of gestation.

3.2. Benefits for handicapped dependent children

There is also a special family allowance scheme for handicapped children.

The above cash benefits (in Sections 3.1 and 3.2) are not taxable.

4. Main changes in the tax/benefit system since 2006

• The relief for disabled taxpayers was restructured. Former partial exemptions and allowances were replaced by tax credits.

• Tax credits for higher income households were limited or abolished;

• The fiscal autonomy of local authorities (municipalities) increased. They may set the level of their share in the revenue from personal income tax, up to 5% of their resident taxpayers’ tax liability. If this rate is set below 5%, the difference will be credited against the taxpayers’ tax liability.

• Tax credits for handicapped taxpayers and dependants were increased.

• Social benefits for dependent children were increased for low income families, single-parent families and families with 2 or more children.

• Introduction of social benefits for unborn children.

• A family coefficient was introduced in 2015 and abolished in 2016.

• From 2016, the tax unit is the individual. However, couples can opt for joint taxation.

5. Memorandum items

5.1. Method used to identify and compute gross wages of the average worker

The operative concept of monthly compensation is that of amounts paid to full time staff before deductions for tax and compulsory contributions. It therefore includes wages and basic salaries of staff paid by the hour, by the job, or by tasks; benefits in kind or housing, if they are considered an integral part of compensation; cash subsidies for meals, housing or transport; bonuses for regular night shifts and seniority, as well as incentive pay and rewards for diligence and productivity; family allowances, compensation for overtime and work on holidays. Benefits, subsidies and bonuses are taken into account only if paid regularly at each pay period.

Payments in kind are incorporated into the concept of compensation. The statistics record such advantages in kind at their taxable value.

All managerial and supervisory workers are included in the computations.

Average annual pay is based on the average of monthly earnings for April and October multiplied by an adjustment coefficient representing the share of annual bonuses and allowances (including vacation subsidies and the Christmas allowance), which is provided by the labour cost survey.

The following formula is applied:

• Average annual pay = Average monthly pay adjusted by the coefficient × 12.

5.2. Description of the employer’s main contributions to private retirement, health insurance schemes, etc.

Outside the social security system, employers are required to insure their employees against work-related accidents (with private insurance companies). They may also provide their employees with life insurance, although this is optional.

Portugal

2017 parameter values

Average earnings/yr	Ave_earn	17 993	Secretariat estimate
Tax allowances	perc	1
	max_al	4 104
Tax credits
Married (basic)	married_cred	0
Single (basic)	single_cred	0
Single parent	singlepar_cred	0
Each child credit	child_cred	600
Tax schedule	tax_sch	0.145	7 091
		0.285	20 261
		0.37	40 522
		0.45	80 640
		0.48
	tax_floor	na
Surtax	surtax_rate	0.025
	surtax_rate2	0.05
	surtax_thrs	250 000
	add_surtax_schedule
		0	20 261
		0.0088	40 522
		0.0275	80 640
		0.0321
	add_surtax_cred	0.025
Social security contributions	SSC_rate	0.11
ceiling	SSC_empr	0.2375
Child benefit Schedule	ch_ben_sch	0	475.8	1st echelon
		2 949.24	362.64	2nd echelon
		5 898.48	328.2	3rd echelon
		8 847.72	0	4th echelon
Extra child benefit for lone parents	ch_ben_lone	0.35
Minimum Wage	MW	7 798
Minimum Disposable Income	MinDispY	8 500

2017 tax equations

The equations for the Portuguese system in 2017 are calculated on individual basis. Couples can opt for joint taxation based on the income-splitting system. In the Taxing Wages calculations, the two systems are modelled and the most favourable system is chosen.

The functions which are used in the equations (Taper, MIN, Tax etc) are described in the technical note about tax equations. Variable names are defined in the table of parameters above, within the equations table, or are the standard variables “married” and “children”. A reference to a variable with the affix “_total” indicates the sum of the relevant variable values for the principal and spouse. And the affixes “_princ” and “_spouse” indicate the value for the principal and spouse, respectively. Equations for a single person are as shown for the principal, with “_spouse” values taken as 0.

 

	Line in country table and intermediate steps	Variable name	Range	Equation
1.	Earnings	earn
2.	Allowances:	tax_al	B	MAX(MIN(perc*earn, max_al), SSC)
			J	MAX((MIN(perc*earn_princ, max_al)+MIN(perc* earn_spouse, max_al)), SSC_ princ+SSC_spouse)
3.	Credits in taxable income	taxbl_cr		0
4.	CG taxable income	tax_inc	B	earn-tax_al
	Adjusted taxable income	tax_inc_adj	J	tax_inc/(1+Married)
5.	CG tax before credits	CG_tax_excl	B	IF(tax_inc>tax_floor,Tax(tax_inc,tax_sch),0)
			J	IF(tax_inc_adj>tax_floor,Tax(tax_inc_adj,tax_sch)*(1+Married),0)
6.	Tax credits :
	Basic credit	basic_cr	B/J	0
	Child credit	child_cr	B	IF(AND(Married>0,earn_spouse>0),Children*child_cred/2,Children*child_cred)
			J	Children*child_cred
	Total	tax_cr	B/J	basic_cr+child_cr
	Surtax	surtax	B	IF(tax_inc>surtax_thrs,(surtax_rate*(surtax_thrs-TopIncBracket)+surtax_rate2* (tax_inc-surtax_thrs)),surtax_rate*Positive(tax_inc-TopIncBracket))+Positive (Tax(tax_inc,add_surtax_schedule)((add_surtax_cred*MW*Children)/(1+ (Married*earn_spouse>0))))
			J	IF(tax_inc_adj>surtax_thrs,(surtax_rate*(surtax_thrs-TopIncBracket)+surtax_ rate2*(tax_inc_adj-surtax_thrs))*(1+Married),surtax_rate*Positive(tax_inc_adj-TopIncBracket)*(1+Married))+Positive(Tax(tax_inc,add_surtax_schedule)*(1+Married))-(add_surtax_cred*MW*Children))
7.	CG tax	CG_tax	B	IF(earn-CG-tax-excl> MinDispY,Positive(CG_tax_excl-tax_cr),0)+surtax
				IF(earn-CG-tax-excl> MinDispY*(1+(Married*earn_spouse>0)),Positive(CG_tax_ excl-tax_cr),0)+surtax
8.	State and local taxes	local_tax	B/J	0
9.	Employees’ soc security	SSC	B	earn*SSC_rt
11.	Cash transfers	cash_trans	J	=IF(Married=’0,’ VLOOKUP(earn/(Children+1),ch_ben_sch,2,1)*Children*(1+ch_ ben_lone), VLOOKUP(earn/(Children+1),ch_ben_sch,2,1)*Children)
13.	Employer’s soc security	SSC_empr	B	earn*SSC_empr

Key to range of equation B calculated separately for both principal earner and spouse P calculated for principal only (value taken as 0 for spouse calculation) J calculated once only on a joint basis.