Have you heard of englobamento? This is a taxation system that might help save on income tax, especially for those who have received interest from term deposits, Savings Certificates, dividends, or rental income in 2024.
Let’s break it down. First, it’s important to highlight that, under income tax regulations, not all income is treated equally.
“The taxation rules vary depending on the category of the income, meaning the source of the money. In other words, a euro earned from working does not pay the same tax as a euro earned from investments (rents, interest, dividends, etc.),” as explained on the financial education portal EI, of the Associação Mutualista Montepio.
In the realm of income tax, there are three ways to tax income: through englobamento, withholding tax rates, or special rates.
“However, some income taxed by withholding or special rates may, at the taxpayer’s choice, be taxed by englobamento,” and there are situations where this is beneficial.
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How does englobamento work?
According to the same portal, “taxation by englobamento involves adding income from different categories—some by requirement, others by the taxpayer’s choice—and subjecting them to the general income tax rates“.
“These rates are progressive. That is, they increase as income rises (by brackets), ranging from 13% to 48%, excluding solidarity rates,” the information states.
To englobar or not to englobar?
The decision to opt for englobamento of income should be made cautiously and based on simulations, but generally, there are two scenarios where opting for englobamento may be advantageous, according to the website Saldo Positivo, of Caixa Geral de Depósitos (CGD):
- Low income – “According to the tables for 2024, taxpayers with taxable income within the first four tax brackets, that is up to 21,321 euros, pay an income tax rate of up to 26%, which is lower than the 28% withholding tax rate applied to some capital or real estate income. In such a case, it may be worthwhile to add income subject to autonomous taxation to work income”;
- In case of a negative balance between capital gains and losses – “Another situation where opting for englobamento may be advantageous is when there is a negative balance of capital gains, for example, resulting from the sale of shares (category G). By opting for englobamento, this loss is deducted from potential future capital gains (same category) over the next five years”.
Another example: “Imagine someone received 2,000 euros in interest last year. Withholdings at source were at 28%, meaning 560 euros went to the state. If now these interests are included in the income tax and, for example, pay 16.5%, only 330 euros would need to be paid, yielding a saving of 230 euros,” explains SIC Notícias under the Contas Poupança program.
However, one must be mindful that “by adding interest and rents to your pension or salary, the total income tax you pay will increase”: “You recover the 28% you handed over to the state, but check if this impacts any benefits you are receiving, like family allowances, social energy tariff, or the solidarity supplement for the elderly. A euro in income tax can make a difference,” points out the same broadcaster.
