Portugal has cut its income tax the most in the EU, but why has the tax burden on labor increased?

How Portugal's Tax System Has Changed

Over the past decade, Portugal has become the leader among European Union countries in reducing the share of personal income tax (IRS) in tax revenue. According to the European Commission's annual report, the share of income tax revenue decreased by 5.2 percentage points between 2014 and 2024. However, revenue from mandatory social contributions increased significantly, increasing by 3.6 percentage points.

This redistribution of the tax burden has not resulted in a reduction. On the contrary, the overall burden on income from employment continued to increase, especially after the pandemic, when the labor market began to actively recover.

Why Social Contributions Have Increased

The change in the structure of tax revenue is linked to several economic factors. In recent years, Portugal has seen steady growth in employment and wages. The government also repeatedly raised the minimum wage, which automatically increased the amount of social contributions received by the budget.

At the same time, the government reformed the income tax system. Progressive tax rates were adjusted, and tax benefits and deductions for individuals were expanded. This reduced the tax burden directly through income tax, but increased social contributions partially offset this effect.

Tax burden remains below the EU average

Despite the increase in social contributions, Portugal still maintains a competitive tax system compared to many European countries. According to the OECD *Taxing Wages 2026* report, the total tax burden on labor, including income tax and mandatory social contributions, will be approximately 39.3% in 2026. For comparison, the European Union average is 41.7%.

This means that, while maintaining a high level of social security, the country remains attractive to both workers and foreign investors considering starting a business in Europe.

General Tax Policy Trends in Europe

In 2024, social contributions became the largest source of tax revenue in the European Union, accounting for 32.9% of total tax revenue. Income tax accounted for 24.3%.

Experts also note the so-called "fiscal progressivity" effect. Due to inflation and rising wages, many workers automatically move into higher tax brackets, even if the tax rates themselves remain unchanged. As a result, real tax payments increase without formal tax reform.

This trend is becoming characteristic of many European countries and is impacting both the labor market and the investment climate.

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