Income tax witholding rates amended so pension increases effective

The withholding tables for Portugal’s personal income tax (IRS) are to be rectified to ensure that pension increases that began being processed in January are not completely absorbed by the tax, so ensuring a net increase in monthly income.

The law with the new withholding tables, which Lusa has seen, was published on Monday in the state gazette, taking retrospective effect on January 1 2022, and the entities that process payment of pensions should proceed to return the excess withheld in January.

“The new table applies from January 1 2022, so any processing that is done based on another table will be subject to correction in future processing and return of what was over withheld,” an official source at the Ministry of Finance told Lusa.

This rectification of the tables for withholding tax became necessary after it was found that those initially published to apply in the mainland and the Azores region in 2022 did not safeguard situations in which the increase resulting from this year’s update of pensions could lead to an increase in the withholding rate, meaning that the pensioner received less money at the end of the month.

In the statement of rectification that announces the publication of the new tables, it is noted that the initial ones had not “safeguarded the increases in net income for all pensioners, specifically, in tables VII – pensions, VIII – pension income, disabled holders and IX – pension income, disabled holders of the armed forces.”

As Lusa reported on January 13, pensioners’ associations had received reports from pensioners who complained that they were receiving less money each month because they had moved up the tax bracket in the IRS withholding tables due to the increase that took effect in January.

One of the cases reported to Lusa was that of Manuel Estevão, who in January began receiving €36 less per month than he had last year, despite the fact that his pension had been increased, under the regular update under the law.

The new rectified tables published on Monday deal with these situations, which would affect about 1% of pensions, according to a report in Jornal de Notícias newspaper.

In a joint response, the Ministry of Labour, Solidarity and Social Security and the Ministry of Finance said that, although the number of pensioners affected was “residual”, the government would make sure “to be attentive to this situation that, as noted, affects about 1% of assigned pensions.”

The differences between the initial tables and those now republished, after rectification, appear in the first brackets of withholding rates.

Thus, in the tables initially published for 2022, a couple both of whom are holders of this type of income or a pensioner alone were exempt from withholding tax only if their monthly pension was no more than €710 gross, with a rate of 4% applying if the value was between €710 and €740.

In the new, rectified tables the exemption up to €710 is maintained, but the next bracket is extended to €773, with the applicable rate still 4%.

The adjustment of the income brackets occurs throughout the entire table. For example, a rate of 28.6% was initially applied to pensions of between €2,870 and €3,062 a month, while in the new tables this rate now covers pensions between €2,884 and €3,076.