Portugal payroll and benefits guide
What global businesses need to know about payroll in Portugal
Did you know that average full-time wages in Portugal are less than half what they are in Germany? What some might see as the sign of a struggling economy is actually a marker of opportunity.
Portugal is a welcoming country to foreign businesses, underlined by its current phased reduction in its corporation tax rate. By 2028, the rate will drop to just 17%, one of the lowest in western Europe. Incoming international businesses can benefit from that, plus a winning combination of lower staffing costs, a well-educated workforce, a stable currency in the form of the euro, and excellent trade and geographical links.
Getting a foreign enterprise up and running in Portugal is relatively quick and easy, but things won’t necessarily be as simple once you’re there. You’ll have recent changes to income tax thresholds and minimum wage rates to get to grips with (including having to pay 14 months of salary each year!), and handle complexities in how parental leave is structured and paid for. This guide covers all the latest information around running payroll in Portugal.
Getting Started
Businesses in Portugal can be partnerships, cooperatives, or limited companies in private or public forms. The minimum share capital requirement for private limited companies (LDAs) was removed at the start of 2025, although there is still a nominal minimum requirement of €1 per shareholder. Public limited companies, however, retain a minimum start-up capital of €50,000 (approx. £43,300; $58,100).
New limited companies can be set up very quickly, either online in 1-2 business days, or in-person in just one hour if all the relevant representatives and documentation are present. Both of these services cost €360 (approx. £310; $420). These processes cover all the relevant registrations, such as those needed with the tax, commercial registry and social security offices.
Companies will need an in-country bank account (and an accountant) in order to make payments to the tax and social security authorities. Banks typically make it easy to set up an account for businesses, so this step should not take very long.
Employment Requirements in Portugal
Written contracts are mandatory in Portugal, and these must include information regarding all the terms and conditions for employment. Using temporary contracts for employees who are conducting permanent work is strictly forbidden.
Portugal’s standard working week is 40 hours, spread across five eight-hours shifts, in line with many other European countries. While working patterns can vary, it is still common for some shops and businesses to close for a longer lunch break (often between 1:00pm and 3:00pm), with employees instead working later finishes or split shifts to complete their hours.
These conditions can vary to a certain extent in employment contracts or collective bargaining agreements. Employers are also able to apply flexible working schemes for particular employees for a limited period, which enables working hours of up to 12 per day and 60 per week.
Overtime is generally limited to a maximum of two hours per day, eight per week and 150 hours per year; the annual limit can be increased to 175 hours for companies with a headcount of less than 50, and 200 hours if agreed through collective bargaining. Overtime should be paid at 125% for the first hour, 137.5% for any hours after that, and 150% for any time on rest days and public holidays. Night work attracts a further 25% premium, and employees can choose to take time off in lieu instead of overtime pay.
Probation periods are three months, increasing to six months for technical roles and eight months for senior management. Notice periods tend to be seven days during probation, rising to 15 days after that, then 30 days after a year, 60 days after five years, and 75 days after ten years.
Compensation and Severance
The minimum wage in Portugal is regularly adjusted upwards, and has increased by almost 50% in the space of just ten years.
As of January 1 2026, the minimum wage was increased by €50 per month to €920 (approx. £795; $1,070). However, employees in Portugal are paid for 14 months a year rather than 12: as well as their usual monthly payments, they also get a 13th-month bonus in June, in time for their summer holiday, and a 14th-month bonus in December, in time for Christmas. This adds up to a total annual minimum wage of €12,880 (approx. £11,100; $15,000).
While there is no mandatory custom for wage growth or bonuses, employees and employers can discuss and come to terms with payment structures for the foreseeable future. Offering employee benefits on top of salary is also common. When meal vouchers are offered, the first €6 a day paid in cash, or €10.20 when paid with a meal card, are tax-exempt.
Severance pay is 14 days’ salary per year of service (capped at a maximum of one year’s salary), or 24 days per year for fixed-term contracts. Many employees, however, negotiate better severance packages than the statutory minimums, especially in cases of mass layoffs.
Tax and Social Security
Income tax contributions and social security payments are withheld at source by employers, and the rates are relatively high. However, at the start of 2026, the thresholds for all nine progressive bands were slightly increased, and the rates for every band except the highest one were slightly reduced, helping ease the tax burden for most employees.
The lowest of 12.5% applies to the first €8,342 earned each year (approx. £7,200; $9,700) . Further rates of 15.7%, 21.2%, 24.1%, 31.1%, 34.9%, 43.1% and 44.6% are applied to progressively higher earnings. The highest rate of 48% is used on all annual earnings over €86,634 (approx. £75,000; $101,000).
An additional solidarity tax of between 2.5% and 5% applies to earnings between €80,000 per year (approx. £69,200; $93,000) and €250,000 per year (approx. £216,000; $291,000). Non-residents are taxed at a flat rate of 25%.
Social security contributions run at 23.75% from employers and 11% from employees. On top of this, employers have to pay 1.88% into the Labor Accident Insurance fund, and 1% into the Wage Guarantee fund. Portugal does, however, have agreements with some other countries regarding social security “totalization”, including with the United States, which prevent expats having to pay contributions in two countries at the same time.
The Portuguese government has approved a gradual reduction in its corporate tax rate, which was 20% until the end of 2025. It has been reduced to 19% for 2026, and will be further cut to 18% in 2027 and 17% in 2028. Lower rates usually apply to small and medium-sized businesses on the first €50,000 (approx. £43,300; $58,100) of their annual taxable income, and to businesses in the Azores and Madeira.
VAT is 23% on the mainland, 22% on Madeira and 16% in the Azores. From July 1 2026, a group business comprising a parent and subsidiaries will be able to form a ‘VAT group’, which means they can file one overall VAT return covering all the businesses involved. This should enable administrative efficiencies, and enable VAT offsetting in some cases.
New legislation has now been introduced that allows employers to deduct more expenses from their tax payments, if they raise salary payments across the board for employees covered by collective bargaining agreements. If the average annual base salary is increased by 4.7% in any one year (including for employees earning below the average), then up to five times the monthly minimum wage can be deducted per employee; for 2026, this is €4,600 (approx. £4,000; $5,350).
Holidays and Leave in Portugal
Paid leave entitlement in Portugal is reasonably generous at 20 days for the first year, and 22 days per year thereafter. Normally, at least ten days of this are taken in a single block in the summer. By mutual agreement, unused leave can be carried over and used by the end of April of the following year.
In addition, Portugal has 13 paid public holidays, and employees who are required to work on these days must be given an alternative day off. Holidays that fall on Saturdays or Sundays don’t normally generate a weekday off in lieu. Additionally, each of Portugal’s local municipalities (there are over 300 of them) also have one day of public holiday each year, which should also be paid time off for employees that work there.
Sick pay starts at the fourth day of a certified illness, and is paid by social security if they have at least six months’ service. Sick pay rates run at 55% of salary from day four to 30, then 60% up to 90 days, 70% to the end of the first year, and 75% after that to a maximum of three years. Leave entitlements also extend to bereavement (five days, paid), care for a family member under 12 (30 days, paid), care for an elderly relative (15 days, paid), and marriage (15 consecutive days, paid).
Parental, maternity and paternity leave is slightly complicated. Firstly, mothers should take six weeks compulsory leave post-birth, while fathers are required to take 28 mandatory days (the first week after the birth, and any three of the following five weeks in one-week blocks).
All of those days come out of the total parental leave entitlement, which is either 120 days at full salary, or 150 days at 80% salary (all paid by social security). Parents can choose to give one parent the remaining entitlement of both, but if they choose to share them, they receive an extra 30 days each.
Payroll in the Portugal: A summary
Portugal offers great opportunities for international expansion, especially as its typical salaries are among the lowest in western Europe, and its corporation tax rate is coming down. However, it can be a tricky country to operate in from a payroll perspective, with a wide range of income tax bands, complex approach to parental leave, and a minimum wage rate that is increasing regularly. Working with a global payroll provider, particularly one with specialist experts in Portugal, can help you establish compliance today — and maintain that compliance in the future.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.
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