What does withholding mean?
Have you seen the term “withholding” mentioned on your payslip and are aware that it is related to the IRS, but don’t understand what it means and how it applies? Find out all about this tax that is directly levied on 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 so-called because they are directly levied on the salary of taxpayers, being of a progressive nature, that is, the higher the income, the greater the taxation applied to them.
What is withholding tax?
It is a mechanism of the Portuguese tax system through which the State directly collects the salary of all employees (both public and private sector employees), pensioners, or non-exempt self-employed workers, so that, instead of being these to transfer the part of your salary that is subject to tax to the State, it is the employer that does so.
The withholding tax is applied in the form of a rate that is directly and monthly levied on the salary, being defined annually through the so-called Withholding Tax Tables, which are available for consultation on the Finance Portal and which are prepared within the scope of the State Budget.
These Tables are divided between the values that apply to the Mainland and those that refer to the Autonomous Regions of Madeira and the Azores individually.
Upon delivery of the IRS Declaration for the previous year, the State proceeds with the adjustments of the schedule 1 taxes that taxpayers paid through this mechanism.
How do you know which value applies to you?
The calculation of this taxation is fundamentally based on three factors:
- Gross salary;
- Household situation (whether the taxpayer in question is single or married and has children or not);
- A number of household members earning income.
The higher the monthly remuneration of the taxpayer, the higher the rate applied.
Withholding rates and IRS brackets are different, although they are often confused. However, both are related insofar as the income tax brackets constitute taxable income intervals.
Withholding at source is made directly by the employer in the context of processing wages, so the taxpayer does not have to worry.
To find out which withholding tax applies to your salary, you must first consult the table that relates to 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 be multiplied by 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 to the State, from this amount you must subtract the Single Social Tax (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 in 2022?
Since the IRS tables for 2022 have already been published in the Diário da República, it is possible to see that employees and pensioners with income of up to 710 euros per month are exempt from withholding tax.
Therefore, there is a waiver of withholding tax in 2022 for wages up to the aforementioned amount.
This means that, compared to 2021, there was an increase of 24 euros in the level from which salaries and pensions are taxed.
It is important to note that since there is less withholding in 2022, IRS refunds in 2023 will also be lower.
According to the data provided by the Government, this adjustment in retention will allow, during 2022, additional liquidity of 175 million euros to families.