IRS Refunds Will Decrease in 2025

Portugal’s Public Finance Council (CFP) projects a drop of around €1.167 billion in total IRS refunds for the 2025 tax season due to last year’s adjustments in withholding rates

Overview: IRS Refunds to Drop in 2025

Portugal’s Public Finance Council (CFP) estimates that IRS reembolsos (income tax refunds) will fall by approximately €1.167 billion in 2025 due to the reduction in IRS retenção na fonte during September and October 2024. This change leads to increased direct tax revenues for the State in 2025. The CFP emphasizes that this is a one‑off effect, not expected to repeat in 2026

2. IRS Table Reform: Rate Reductions

In mid‑July 2025, the Government passed a reform of IRS withholding tables to implement tax relief estimated at €500 million for 2025. The reform applies to IRS rates for the 1st to 8th income brackets; taxpayers in the 9th bracket benefit indirectly due to the progressive nature of IRS calculation 

IRS Retention Rates: Before and After

IRS Bracket	2024 Rate	2025 Rate	Reduction (pp)
1st	13.0%	12.5%	–0.5
2nd	16.5%	16.0%	–0.5
3rd	22.0%	21.5%	–0.5
4th	25.0%	24.4%	–0.6
5th	32.0%	31.4%	–0.6
6th	35.5%	34.9%	–0.6
7th	43.5%	43.1%	–0.4
8th	45.0%	44.6%	–0.4
9th	48.0%	48.0%	—

These applied in two phases: August–September (retroactive to January) and from October onward, with reduced deductions but more aligned with actual liability.

3. Timeline of Changes

• 10 July 2025: IRS reduction proposal approved in Parliament with support of PSD, CDS‑PP, Chega, and IL parties; PS and JPP abstained, while Livre, PCP, and BE opposed.

• Subsequently, Presidential approval and publication in the Diário da República were pending.

• August–September 2025: Employers start applying new withholding tables retroactively.

• From October 2025: Monthly IRS retenção aligns more closely with the full-year IRS liabilities.

4. What This Means for Taxpayers

Short‑Term Net Income Increase

Taxpayers saw significantly higher net salaries and pensions in August–September thanks to the reduced IRS retenção na fonte. For example, someone earning a gross salary of €1,136/month had no IRS deduction in those months—compared to a typical €3 3/month—because the retroactive adjustment over-refunded approximately €180 to recover excess withholding earlier in the year.

A single worker earning €1,500 gross saw net pay rise from €1,149 (July) to €1,327 in August–September, before dropping to €1,154 in October—just €5 more than pre‑adjustment levels

IRS Settlement (Declaracao and Acerto) in 2026

PwC simulations confirm that, in most cases, taxpayers will receive smaller IRS rebates, or even owe additional tax, when labeling 2025 income in the IRS declaração filed in 2026. A single person earning €1,500 gross pays about €2,354 in total IRS, but with only €2,228 withheld, they face a remaining payment of €126 in 2026—compared to €91 for 2024 income.

For higher earners (e.g. €3,000/month), monthly net income rises sharply in August–September, but smaller refunds or extra payments are expected during the IRS acerto in 2026.

5. Summary Table: Effects of IRS Changes

Aspect	Expected Effect in 2025/2026
IRS reduced withholding (Aug–Sept 2025)	Increased net pay temporarily
Total reduction in IRS reimbursements	Approx. €1.167 billion fewer refunds in 2025
IRS rate changes	Rate cuts across 1st–8th brackets; 9th tier benefits indirectly
Final IRS settlement for 2025 income	Generally lower refunds or extra tax owed in 2026
Recurrence of effect	One‑time event; no repeat expected in 2026

6. How to Prepare

• Review IRS retenção na fonte entries: Ensure that withholding data matches your actual payments.

• Prepare for IRS declaração in 2026: Understand deductions such as dependents, rent, health, and education to minimize final IRS accuracy.

• Expect possible payment: Some taxpayers may owe additional IRS instead of receiving a refund in their 2026 filing.

• Be aware of deadlines: IRS declaração for 2025 income typically runs from April to June 2026, and any payment due should be settled by 31 August 2026 to avoid penalties (e.g., fines ranging from €150 to several thousand) 

7. Final Thoughts

Portugal’s adjustment of IRS retenção na fonte in 2024 created a short‑term benefit in the form of higher disposable income during late 2025.

However, this resulted in a €1.167 billion drop in IRS refunds for 2025, and the consequence will be felt in 2026, when final tax settlements may reveal smaller refunds or additional IRS liabilities. While the reform aligns monthly withholding more accurately with yearly tax obligations, taxpayers should plan ahead to avoid surprises during the IRS declaração process.

If you'd like help estimating your own IRS refund or liabilities, given your income and deductible expenses, just let me know!