Portugal Payroll and Benefits Guide

What global businesses need to know about payroll in Portugal

Just like its neighbor Spain, Portugal transitioned to democracy in the 1970s and experienced a sustained period of growth and modernization. They joined the European Union (then the EEC) at the same time in 1986, and while Spain has grown into a major economic powerhouse, its smaller Iberian neighbor has sometimes been overlooked. But therein lies some serious opportunities for international businesses coming into Portugal.

For starters, average wages in Portugal are around a third lower than they are in Spain, even though they both use the euro; indeed, Portugal has the lowest average wage of any country in Western Europe. Portugal is also a country that has worked hard to encourage incoming investment, and is relatively free of complexity when it comes to business set-up, employment laws, and running payroll.

This guide highlights all the key points around running payroll in Portugal, so you can see just what you’ll need to do, and so you can understand the scale of its investment potential.

Getting Started

Businesses in Portugal can be partnerships, co-operatives, or limited companies in private or public forms. Private limited companies require a minimum capital investment of €5000 (approximately £4300; $5400) and for each shareholder to pay at least €100 (approx. £85; $110) per share; public limited companies require at least five shareholders and a minimum start-up capital of €50,000 (approx. £43,000; $54,000).

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; $390). 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

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. 

Working hour limits in Portugal are broadly in line with most other Western countries at 40 hours per week and eight per day. Typical timings may vary, however, as many businesses in Portugal still take a longer lunch break during the day, and so may operate from 9 am until 1 pm and then from 3 pm until 7 pm. It’s worth noting that 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 limited to a maximum of two hours on working days (paid at 125% of salary for the first hour and 137.5% for the second), and eight hours on rest days or public holidays (paid at 150% for all hours worked). Annual overtime limits of 150 hours for employees at larger businesses and 175 for those at smaller businesses also apply, although these can be extended to 200 hours with union agreement. 

Probation periods are three months, increasing to six months for technical roles and eight months for senior management.

Compensation and Severance

The minimum wage in Portugal is regularly adjusted, and the increase that took effect on January 1st, 2024 is the biggest ever in percentage terms. The rate has increased by 7.9%, from €760 to €820 per month (approx. £710; $880). This works out at €11,480 per year (approx. £9900; $12,400), which is spread across 14 paychecks – 12 regular monthly payments, the holiday payment in June, and the Christmas payment in December. 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. 

Notice periods in Portugal vary depending on the length of service, starting at seven days if less than six months of service (or during probation), rising to one month after six months’ service, and two months after two years. Severance pay is normally between 12 and 18 days’ pay per year of service, up to one year’s salary, paid 50.50 by employers and social security. Many employees, however, negotiate better severance packages than the statutory minimums, especially in cases of mass lay-offs.

Tax and Social Security

Income tax contributions and social security payments are withheld at source by employers, and income rates in Portugal are relatively high. There are now nine progressively increasing tax bands: the lowest of 14.5% applies to the first €7479 (approx. £6450; $8050) of annual income; the highest of 48% applies to all earnings above €78,834 (approx. £68,000; $85,000). In 2023, an additional solidarity tax of between 2.5% and 5% was introduced for earnings above €80,000 (approx. £69,000; $86,300). 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 1.75% into the Labour 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. In the case of the US, employees of American companies who are sent to work in Portugal for less than five years only have to pay US social security.

Portugal’s corporate tax rate is 21%, although lower rates of 14.7% apply in Madeira and the Azores. Additionally, small and medium enterprises can enjoy reduced rates on the first €50,000 (approx. £43,000; $54,000) of their annual taxable income: 17% in most areas, and 11.9% in Madeira and the Azores.

Holidays and Leave

Employees in Portugal are entitled to 22 working days of paid leave each year, although these are normally taken in one or two large blocks. New employees can accrue two days of leave each month through most of their first year of service.

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. Local municipalities also have their own holidays each year, and employees are entitled to take the day off on holiday days that apply to the location where they work.

Paid maternity leave entitlement is 120 days, paid at full salary rate by national social security, as long as they have completed at least 80 days’ employment in the 12 months prior to their due date. Paternity leave is similarly funded by the state and is mandatory for four of the first six weeks of the child’s birth, including the first five days immediately after the birth. Fathers can also take a fifth paid week off in that six-week period if they so wish. Beyond this, further parental leave is shared between the two parents, and is paid at either 100% or 80% depending on how much they take.

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% 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).

In Summary

There are many other countries in Europe where the employment and payroll legislation is much more complicated than it is in Portugal. But that doesn’t mean that you shouldn’t make every effort to ensure compliance and stay on top of the regulations as they evolve. Working with a global payroll provider can remove the risk of any penalties or mistakes, and allow you to focus on making the most of your opportunities in this exciting European market.

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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