Have you seen the term “withholding tax” mentioned on your salary receipt and are aware that it is related to the IRS, but do not understand what it means and how it applies? Find out everything about this tax that directly affects your monthly salary or pension.
Understand the difference between direct and indirect taxes
There are two types of taxes levied in Portugal.
Direct taxes are thus called because they directly affect taxpayers’ wages and are progressive in nature, that is, the higher the income, the higher the taxation applied to them.
Examples of direct taxes are: IRS (Personal Income Tax), IRC (Corporate Income Tax) and IMI (Municipal Property Tax).
In turn, indirect taxes are applied to the prices of various goods and services, thus affecting consumption and reverting to the State. This is the case of VAT (Value Added Tax), IUC (Single Circulation Tax), IMT (Municipal Tax on Onerous Transmissions of Real Estate), among others.
In this sense, withholding tax falls into the category of direct taxes. Get a better understanding of this type of taxation.
Be sure to also see: IMI exemption – who can apply and how?
What is withholding tax?
It is a mechanism of the Portuguese tax system through which the State directly collects the wages of all employees (both civil servants and the private sector), pensioners or non-exempt independent workers, making them, instead of being these transferring the portion of your salary that is subject to taxes to the State, it is the employer that does it.
The withholding tax is applied in the form of a fee that directly and monthly levies on the salary, being defined annually through the so-called Withholding Tax Tables, which are available for consultation on the Finance Portal and are prepared within the scope of of the State Budget .
These Tables are subdivided between the values that are applied to the Mainland and those that refer to the Autonomous Regions of Madeira and the Azores individually.
When submitting the IRS Declaration for the previous year, the State will make adjustments to the taxes that taxpayers paid through this mechanism.
See also: How to validate invoices for the IRS?
How do you know which value applies to you?
The calculation of this taxation is fundamentally based on three factors:
- Gross wages;
- Household situation (whether the taxpayer in question is single or married and whether he has children or not);
- Number of members of the household earning income.
The higher the taxpayer’s monthly remuneration, the higher the rate applied.
Withholding rates and IRS brackets are different, although they are often confused. However, both are related to the extent that the income tax brackets are constituted as intervals of taxable income.
Withholding tax is made directly by the employer in connection with the processing of wages, so the taxpayer does not have to worry.
To find out what is the withholding tax that applies to your salary, you should first consult the table regarding your family situation (dependent worker or pensioner, married or single, with or without children). Once the corresponding table is found, the value of your gross salary must multiply the respective rate.
By the way, if you also want to know how much you will have to deduct, in full, from your gross salary for the State, you must subtract the Single Social Rate (TSU), which is 11%, and the respective withholding tax that applies to your salary. This way you get the value of your net salary .
Is there any exemption from withholding tax?
One of the major changes in 2020 in this area was the updating of the withholding tax rates by 0.3% (which corresponds to inflation in 2019) and the increase in the value of wages after which there is an obligation to discount for Security Social, which is now 659 euros monthly (and which was 654 euros in 2019).