how it works and what changes in 2023

If you have income from work or pensions, you should already be familiar with the term withholding🇧🇷 And you have certainly already realized that this means that there is a part of that income that, monthly, is deducted for IRS purposes.

The withholding tax thus corresponds to this portion of the salary or pension. In 2022 there was already news on this topic, and in 2023 there will be even more changes.

What is withholding tax?

The withholding tax is a tax that the Treasury applies to the income of pensioners and the wages of taxpayers who work for others. Self-employed workers can also withhold tax, but with different rules.

The amount corresponding to this fee is paid as soon as the income is made available. That is, the money goes directly to the Tax Authority (AT) coffers. That’s why it’s called withholding.

How much is the withholding tax?

As with other taxes, the withholding tax varies depending on the taxpayer’s financial and family background and grows in proportion to your ability to pay.

In addition to where you live (since retention rates in mainland Portugal differ from those practiced in the autonomous regions), retention rates also depend on factors such as the number of dependents and holders or the fact that you have a disability .

Simply put, the withholding tax is greater the higher the income and the lower the taxpayer’s obligations. That is, those who receive more money pay more than those who receive less.

What changed in 2022?

Withholding rates in 2022 have been updated, reflecting the increase in the minimum wage to 705 euros per month. Thus, the amount from which income tax begins to be deducted went from 686 euros (2021 value) to 710 euros monthly grosswhere the limits of the intervals of the vseveral echelons have also been updated.

The objective was to give, to those with lower incomes, some more money available at the end of the month. However, these people should, in 2023, receive a lower IRS refund than in previous years.

In the case of pensioners, there was only one change to the lowest step.

What will change in 2023?

The State Budget (OE) for 2023 brings some news about withholding tax.

Thus, as of January 1st, a new withholding tax system will apply for employees and pensioners. The purpose of this measure is “to allow the application of withholding rates that are more appropriate to the tax situation”. That is, to avoid situations in which “an increase in gross income is not reflected in an increase in net income”, because, by receiving more, the taxpayer also has to withhold more tax.

Until now, this increase in taxation ended up being corrected through the refund of the IRS. That is, the taxpayer would later receive what he withheld in excess. With these changes, the idea is that the retention is closer to the income and, therefore, the reimbursement decreases.

One year, two retention models

Thus, in 2023 there are two phases with regard to retentions. That is, there are tables that are in effect between January 1 and June 30 and others that apply only in the second half of the year.

The idea is that, as of July 1, the withholding tax will be further reduced, thus increasing the net income of employees and pensioners.

In any case, relief in the tax burden of the lowest incomes begins in January. The withholding tax is now applied only to salaries and pensions equal to or greater than 762 euros gross monthly.

According to simulations by the Ministry of Finance, anyone earning a salary of 1,350 euros will pay 15 euros less in tax in January. From July, you will pay 25 euros less than you paid in 2022.

Who has housing credit can make less withholding tax

Another measure presented in the OE 2023 is aimed at those who have an income of up to 2,700 euros a month and a mortgage loan. The aim will be to minimize the impact of rising interest rates on disposable monthly income. These taxpayers can move to the withholding tax bracket immediately below the current one.

The measure applies only for employees🇧🇷 If you want this reduction in withholding tax, you must inform your employer. They will also have to submit a declaration and elements to verify that they meet the necessary conditions.

However, it is important to understand that, when submitting the IRS declaration in 2024 (which concerns the 2023 income), the reckoning will be done. That is, as these taxpayers withheld less tax, the refund, if any, will be lower. If they used to pay IRS, they might have to pay more.

The relationship between withholding tax and the IRS

Although they are often confused, withholding rate and IRS tax bracket are not the same thing. However, they are intertwined.

Thus, an IRS bracket is a range of values ​​within which taxpayers have to pay a certain percentage of what they have earned in taxes. The higher the bracket (ie, the higher the income), the higher the percentage of taxes owed to the State.

The withholding rate, on the other hand, is how the IRS is applied. That is, instead of paying the taxes you owe the State all at once, they are taken from your salary in stages.

Basically, it’s as if you were paying the IRS in installments🇧🇷 Every month the State takes a part of your salary, so that when you submit the statement, you don’t have to pay or receive reimbursement.

The idea has been to approximate, as much as possible, the retention rate to what it should effectively deduct to the IRS.

However, there are almost always adjustments to be made. Income from self-employment, expenses with collection deductions and other variables will influence the final bill.

Why does withholding tax never work out at the end of the year?

The truth is that withholding tax is little more than a prediction of what you have to pay🇧🇷 The State has no way of knowing, to the cent, how much it will earn in a year, much less how much it will spend on deductible expenses. That is why, after submitting the IRS declaration, a correction of the numbers is necessary.

Based on your income, the State points to an IRS scale and, considering the discounts that this scale has to make, calculates a percentage of your salary to make the withholding tax. If nothing else happened, at the end of the year you would have cashed the exact amount that corresponds to your IRS tax bracket.

But in a year a lot happens: wages increase, unemployment happens, health expenses add up. At the end of the year, Finance has to go back and review everything the taxpayer has received and paid. It is necessary to redo the accounts and understand the difference between what has already been deducted in withholding tax and what remains to be deducted.

If you discounted more, you are entitled to a refund. If the withholding was less than what you owed, you have to pay the IRS.

How do you know how much you have to do withholding at source?

At the outset, you don’t have to worry about how much you have to leave for withholding tax, since, as we explained to you, it is your employer who has to keep that amount and hand it over to the State. Or, in the case of pensioners, it is the State itself that withholds whatever it has to withhold.

However, if you are really interested in knowing how much you “lose” for withholding, you can consult the withholding tables in the Diário da República. He can see here the tables in force between January 1st and June 30th🇧🇷 The withholding tax tables for the second half of 2023 they are available here🇧🇷

Article originally published in December 2021. Updated in December 2022.