Portugal’s 2025 State Budget has introduced several income tax (IRS) changes, which will impact workers and pensioners. These updates aim to ease financial pressure and improve fairness in the tax system. Here’s our breakdown of the key changes:

The nine income tax bands have been increased by 4.6%. This means more income will fall into lower tax brackets, benefiting taxpayers and ensuring those with modest salary increases don’t face higher tax rates.

Tax Breaks for Younger Workers

The IRS Jovem (that's 'Youth IRS' in English) programme, designed for workers up to 35, has been expanded. The tax exemption period has doubled from five to ten years, and eligibility is now open to all workers, regardless of qualifications. The exemption applies to annual income up to around €28,000, with full exemptions in the first year, gradually reducing over the following years.

The specific deduction, which reduces the taxable income of workers and pensioners, will increase in value. This adjustment ensures a greater portion of earnings is untaxed, providing relief for lower-income earners, including freelancers.

As of 1 January 2025, this model changes the age of beneficiaries and the duration of the benefit, among others.

What's new in the IRS Jovem?

• The age limit is raised from 30 to 35
• The maximum duration of the benefit will be 10 years
• Access to the IRS Jovem no longer depends on educational level
• The exemption limit increases by around 8,000 euros, from 40 IAS (Social Support Index) to 55 IAS.

The IRS exemption for young people is capped at 55 times the value of the IAS, i.e. close to 28,700 euros:

• 100% in the 1st year of earning income
• 75% from the 2nd to the 4th year
• 50% from the 5th to the 7th year
• 25% from the 8th to the 10th year.

Other Changes

For freelancers, the IRS withholding rate has dropped from 25% to 23%. This change allows more take-home pay for self-employed individuals.

The national minimum wage will remain exempt from IRS. Workers earning up to €870 per month or €12,180 annually won’t pay income tax, ensuring continued support for lower earners.

The meal allowance for employees paid via vouchers will increase to €10.20 per day, while those paid in cash will continue to receive €6 tax-free.

Overtime pay will now be taxed at half the regular rate from the first hour worked, making it more attractive for employees to take on extra work.

Performance and productivity bonuses of up to 6% of an employee’s base salary will be tax-free, provided certain conditions are met. These include companies increasing salaries by at least 4.7% for lower-paid workers.

These updates aim to create a fairer and more supportive tax system. Please speak to one of our team for advice tailored to your circumstances.