The proposal to reduce the IRS in 2025 and the commitment for a further decrease the following year, to be included in the State Budget for 2026, has been approved by the Assembly of the Republic. What are the next steps?
The Upcoming Timeline
For the reduction to take effect, the decree from the Assembly of the Republic must still be reviewed and promulgated by the President of the Republic, Marcelo Rebelo de Sousa, and published in the Official Gazette.
Only after this will the Government change the withholding tax tables to reflect the approved rate changes on 2025 incomes, from the 1st to the 8th bracket.
The Finance Minister, Joaquim Miranda Sarmento, stated on July 7 that the Government plans to apply different tables over the coming months in two phases: first, “already in August and September,” the values will decrease to compensate for the IRS reduction with retroactive effects from January of this year; then, “from October,” other values will be applied that “already monthly reflect the reduction.”
What IRS Relief is Coming?
The tax relief, estimated by the Government at 500 million euros in 2025, will be felt by taxpayers in all brackets.
Although the decree only reduces the rates from the 1st to the 8th brackets, taxpayers in the 9th will also benefit, as the IRS is calculated progressively, due to the rate cuts at the lower levels.
The table reformulation will bring a reduction in rates from the 1st to the 3rd bracket by 0.5 percentage points compared to current rates, 0.6 points from the 4th to the 6th bracket, and 0.4 points from the 7th to the 8th.
The 1st tier rate drops from 13% to 12.5%, the 2nd decreases from 16.5% to 16%, the 3rd lowers from 22% to 21.5%, the 4th decreases from 25% to 24.4%, the 5th drops from 32% to 31.4%, the 6th goes from 35.5% to 34.9%. The 7th reduces from 43.5% to 43.1%, and finally, the 8th goes from 45% to 44.6%. The 9th income tier rate remains at 48%.
Changes in IRS Set for 2026
The decree approved today includes a second provision, added to the Government’s initial proposal by the PSD and CDS-PP benches, to ensure that “in the State Budget for 2026,” the Government proposes to parliament “to further reduce the marginal rates from the 2nd to the 5th bracket by 0.3 percentage points.”
With this initiative, the Government is bound by the Assembly of the Republic to advance with a new proposal of IRS table reformulation, to establish a new reduction of the rates from the 2nd to the 5th bracket, applicable to incomes earned by taxpayers throughout 2026.
The additional reduction by 0.3 percentage points was formalized by the social-democratic and centrist benches to meet Chega’s request, which had presented a law project in this sense but withdrew it from general voting after PSD committed to including this tax relief in the State Budget for 2026.
The monthly IRS discount is defined based on withholding tables, and since the IRS will decrease in 2025, the Government has already confirmed it will adjust the tables, so the deducted monthly amount lowers and aligns closer to the final IRS amount.
How is IRS Calculated?
The IRS is calculated annually on the total income earned by a taxpayer over the 12 months of the year. To ensure the State collects tax revenues throughout the year, each employee and pensioner subject to IRS pays the tax authority a certain amount of IRS each month, based on withholding tax tables.
This amount is deducted directly from salaries and pensions. Later, in the following year, when the tax authority calculates the final IRS, it verifies how much a taxpayer has already paid and considers this amount when settling the tax. This may result in a refund, an amount to be paid to the State because there’s still tax to be delivered, or nothing to be delivered or received.
