The Portuguese government has introduced a range of changes to the IRS (Income Tax) system for 2025, designed to enhance tax fairness and provide greater support to workers and pensioners. These updates were implemented through the State Budget for 2025 (OE2025) and include adjustments to tax brackets, expanded deductions, and targeted relief measures. Below, we’ll explore the most significant changes and how they might impact your finances.
1. Updates to IRS Tax Brackets
In 2025, the limits of the nine IRS tax brackets will be updated by 4.6%. This adjustment ensures that individuals who receive salary increases of up to 4.6% will not face a higher tax rate simply due to inflation. By broadening the income ranges within each bracket, the government aims to prevent wage growth from being eroded by higher taxes, effectively preserving purchasing power.
2. Expansion of the IRS Jovem Program
The IRS Jovem program, which offers tax exemptions for young workers up to 35 years old, has been significantly enhanced. Key changes include:
- Extension of Eligibility: The program now covers a period of 10 years instead of the previous 5.
- Broader Access: All individuals under 35 years, regardless of academic qualifications, can benefit.
- Higher Exemption Threshold: The maximum exempt income has increased to 55 times the Social Support Index (IAS), approximately €28,000 annually.
Tax Exemption Rates:
- 1st Year: 100% exemption.
- 2nd to 4th Year: 75% exemption.
- 5th to 7th Year: 50% exemption.
- 8th to 10th Year: 25% exemption.
This extended relief offers young workers significant tax savings and encourages early career stability.
3. Increase in Specific Deductions
The specific deduction, previously fixed at €4,104, will now align with 8.54 times the IAS. This automatic deduction applies to both employees and pensioners, reducing the taxable income base. For independent workers, this change impacts the portion of income exempt from the requirement to present activity-related expenses.
4. Lower Tax Withholding for Freelancers
Freelancers issuing green receipts (“recibos verdes”) will benefit from a reduced withholding tax rate in 2025, decreasing from 25% to 23%. Unlike employees, freelancers have historically faced a flat withholding rate, regardless of income. This reduction eases the tax burden for self-employed individuals, providing additional liquidity.
5. Minimum Wage Exemption
The minimum income exempt from IRS, known as the “minimum existence” threshold, will increase in line with the national minimum wage. In 2025, individuals earning up to €870 per month (€12,180 annually) will be exempt from paying IRS. This measure ensures that wage growth does not disproportionately impact lower-income earners.
6. Meal Allowance Adjustments
For 2025, the meal allowance paid via a card will see an increase in its tax-free limit, rising from €9.60 to €10.20 per day. The allowance paid in cash remains exempt up to €6 per day. This change incentivizes employers to provide benefits through cards while increasing tax-free compensation for employees.
7. Reduced Tax Withholding on Overtime
Remuneration for overtime work will be subject to a withholding tax rate that is 50% lower than the rate applied to regular salary income. Previously, this reduction only applied after the 101st hour of overtime. In 2025, it will apply from the first hour, significantly benefiting employees who work extra hours.
8. Tax Exemptions for Performance Bonuses
Non-regular bonuses, such as performance bonuses or profit-sharing, will be exempt from IRS and Social Security contributions up to 6% of the employee’s base salary. However, this exemption is conditional on:
- A minimum salary increase of 4.7% for employees earning the base salary.
- A company-wide salary increase of 4.7%.
- The existence of a collective labor agreement updated within the last three years.
This incentive encourages companies to reward employees while promoting fair wage practices.
9. New Withholding Tax Tables
As in previous years, updated withholding tax tables will be implemented in 2025 to accommodate the changes in IRS rules. These tables will ensure that the new exemptions, deductions, and rates are reflected in monthly paychecks.
How These Changes Impact You
Employees:
- Salary adjustments up to 4.6% will not push you into a higher tax bracket.
- Meal allowances and overtime work are subject to more favorable tax conditions.
Freelancers:
- Lower withholding tax rates reduce upfront tax obligations, improving cash flow.
Young Workers:
- Extended IRS Jovem benefits offer long-term savings and greater flexibility in career planning.
Pensioners:
- Higher specific deductions reduce taxable income, ensuring more disposable income.
Planning for 2025
To make the most of these changes, consider the following steps:
- Review Your Tax Situation: Assess how the updated tax brackets and deductions apply to your income.
- Optimize Benefits: If eligible, ensure you’re taking full advantage of programs like IRS Jovem.
- Consult a Professional: Tax planning can be complex, particularly for freelancers and individuals with multiple income sources.
By understanding and leveraging these changes, you can maximize your net income and minimize tax liabilities in 2025.
For further guidance on how these changes might impact your specific circumstances, feel free to reach out. Tax planning tailored to your needs can help you navigate these updates with confidence.
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