Withholding tax will decrease as of July and will generate a smaller refund in 2024

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The new withholding tax system as of the second half of the year will result in a lower amount of personal income tax, which will translate into a smaller refund the following year, says the Secretary of State for Fiscal Affairs.

As of July, the way the IRS withholding tax is done on salaries and pensions will change to a model that approximates the annual calculation of the tax, made when filing the IRS tax return.

Nuno Santos Félix said that with the new system, as of this second semester, “people will have, as a rule, a lower withholding tax”, which will translate into “more disposable income” at the end of the month, and that this “will naturally translate into a lower refund amount in the settlement of the IRS in the following year”.

Instead of the system of rates applicable to various income brackets in force until now, in which a monthly increase of one euro in gross income can lead to an increase in the withholding rate, the new regime contemplates a number of monthly remuneration brackets closer to the IRS tax brackets, to which a marginal rate is applied, with a portion to be deducted. If there are dependents there is a second portion to be deducted.

The objective of the new form of monthly tax advance is, as the governor specified, to ensure “that if there is an increase in gross income, there will always be a greater net income.

For the taxpayer it may be more difficult to understand exactly how much will be withheld monthly from July onwards, but the new tables should dictate for many a decrease in the value of the tax compared to what is now withheld, and it is certain that less withholding immediately will correspond to a lower refund the following year.

So far this year, the average IRS refund (for 2022 income) is around 1,000 euros.

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