The State Budget Law for 2023 introduced a new IRS (personal income tax) withholding tax system, using a revised formula for calculating withholding tax applicable to employees and pensioners. This formula will remain in effect in 2024.
The updated IRS withholding tables for 2024 apply to income paid or made available on or after 1 January 2024 and will remain in effect for the full year.
The legislation that has introduced these changes is as follows:
- Article 281(2) of the 2022 State Budget Law and Article 221 of the 2023 State Budget Law;
- Order no. 13288-E/2023, dated 29 December;
- Articles 99-C and 99-D of the IRS Code.
The new withholding tax model applies a marginal tax rate to monthly income, along with a withholding amount and, if applicable, a fixed deduction per dependent. This calculation provides the total tax to be withheld at source.
The IRS withholding tax rate is shown on your monthly payslip and is determined as described in the previous question. The effective monthly withholding tax rate shown on the payslip is the rate applied each month based on the monthly income earned and the withholding tax calculated using the new tables.
The new tables apply to category A - employment income and category H - pension income and only to resident employees, whereas the previous formula applied to non-residents and non-habitual residents.
There are a total of 11 new tables, the first 7 of which are for employees.In order to identify which table is appropriate for each worker, the following factors must be taken into account: whether or not they are married, whether or not they have dependents, whether there are one or two holders. There are specific tables for disabled people.
Yes. Employees with three or more dependents automatically qualify for a 1% reduction in the maximum marginal rate, provided that the information is duly updated in the UC staff management system.
In addition, employees who meet the following mandatory requirements can benefit from a reduction in their IRS withholding tax by adding €40 to the amount to be withheld:
- Have a duly registered lease or sublease for their first home, or a loan/credit agreement for the purchase, construction or building of their own permanent home.
- Have a monthly salary not exceeding €2,700.
Employees wishing to benefit from this reduction based on their home lease/sublease or loan/credit agreement must inform before payment, the Human Resources Management Services by e-mail at sgrh@uc.pt of their intention to increase the amount of the deduction.
Yes, employees who do not wish to benefit from the abovementioned rate reductions, or who wish to apply an alternative flat rate, may request a higher withholding rate than that established by law. They can do so by completing the form "Declaration - Article 99 of the IRS Code". In section 8, point 2, they must indicate the rate to be applied and send the form to sgrh@uc.pt.
The tax rate for overtime is applied to the monthly salary for the month in which it is paid.
This means that the monthly remuneration for the work performed by the employee is subject to the effective monthly rate resulting from the application of the maximum marginal tax rate, the withholding tax and, where applicable, the additional withholding tax per dependant for the month in which it is paid or made available.
From the 101st month, the rate of withholding tax is reduced by 50%.
The payslip displays the allowance amount and the corresponding withholding tax rate applicable to the employee's monthly income. This rate is calculated by applying the maximum marginal withholding tax rate and, if applicable, the fixed deduction withholding tax rate for each dependant.
In this scenario, the applicable withholding tax table is Table I ('Unmarried with no dependants or married with no dependants'), specifically the variables in line 3.
To calculate the withholding tax, the marginal tax rate of 18% is applied to the monthly salary of €1,000 and the deductible amount is calculated using the formula 18% x 1.4 x (€1,385.20 - €1,000).
Thus
Withholding tax: €1,000 x 18% - €97.07 = €82
The effective withholding tax rate is obtained by dividing the withholding tax amount by the income amount:
Effective withholding tax rate: €82 / €1,000 = 0.082 (8.2%)
In this scenario, the table to be applied will be VI “Married 2 holders with 2 dependants” In this case, we will apply Table I ("Unmarried, no dependants or married, two holders"), using the variables in row 6.
To calculate the withholding tax, the marginal tax rate of 32.75 percent is applied to the monthly salary of €2,000 and a deductible amount is subtracted, as well as an additional amount for each dependant, as follows:
Withholding tax: (2,000€ x 32.75%) - 305.80 - (2 x 21.43€) = 306€
The effective withholding rate is obtained by dividing the withholding amount by the income amount:
Effective withholding tax rate: 306/2000 = 15.3%
In this scenario, the applicable withholding tax table is III (“Married only income holder”) specifically the values in line 5. However, as there are more than three dependants in this case, the maximum marginal tax rate is reduced by 1%.
To calculate the withholding tax, the marginal tax rate of 17,50%, (instead of 18,5%) is applied, the deductible amount is reduced, as well as an additional reduction for each dependant, as follows:
Withholding tax: (1.500€ x 17,50%) - 147,57€ - (4 x 42,86€) = - 56,51€
The effective withholding tax rate is obtained by dividing the withholding tax amount by the income amount. However, in this case we have obtained a negative tax rate, so there will be no monthly withholding tax.
Effective withholding tax rate: - 56.51/1500 = 0%.
(According to 3. of the decree approving the withholding tax tables, the amount may not be lower than zero).
In this case, we will use Table IV ("Unmarried or married with two holders and no dependants - Disabled") and apply the values in line 4. In this case, as you are a first-time tenant with a monthly income of less than 2,700 euros, you will benefit from a reduction in withholding tax by adding 40 euros to the amount to be deducted.
Thus, the marginal tax rate of 37% is applied to the monthly salary of €2500 and the amount to be reduced is deducted as follows:
Withholding tax: 2500€ x 37% - (658.97€ + 40€) = 226€.
The effective withholding tax rate is obtained by dividing the amount withheld by the amount of income.
Effective withholding tax rate = 226/2500= 0.0904 (9.04%).
In this case, we'll use table I ("Unmarried with no dependants or married, two holders") and apply the values in line 3. The rate to be considered is no longer 18%, but 30%, at the employee's option.
Thus, the marginal tax rate of 30% is applied to the monthly salary of €1,000 and the deductible amount is reduced, calculated as follows
18% x 1.4 x (1385.20 - 1000€), i.e:
Withholding tax: 1000€ x 30% - 97.07€ = 202€
The effective withholding tax rate is obtained by dividing the amount withheld by the income.
Effective withholding tax rate = 202/1000 = 20.2%.
In this case, we'll use Table I ("Unmarried, no dependants, or married, two holders"), using the variables in row 5.
The marginal tax rate of 26% is therefore applied to the monthly salary of €1,385.99, minus the amount to be withheld and an additional amount for each dependent:
Withholding tax: (1385.99€ x 26%) - 186.66€ - (2 x 21.43€) = 130€.
The effective withholding tax rate is obtained by dividing the withholding tax amount by the income amount.
Effective withholding tax rate = 130/1385.99 = 9.37%.
In this scenario, we will apply Table II ("Unmarried with one or more dependants"), with the values in line 5. However, as there are three dependants, the maximum marginal tax rate is reduced by 1% and becomes 25% instead of 26%.
Therefore, the marginal tax rate of 25% is applied to the monthly salary of €1,385.99, minus the amount to be deducted and an additional table to be deducted for the three dependants, as follows:
Withholding tax: (1385.99€ x 25%) - 186.66€ - (3 x 34.29€) = 56€.
The effective withholding tax rate is obtained by dividing the withholding tax amount by the income amount.
Effective withholding tax = 56/1385.99 = 4%.
Note: The amounts to be withheld are whole numbers, always rounded to the nearest cent.