Portugal payroll and benefits guide
What global businesses need to know about payroll in Portugal
It’s fascinating to note the economic differences between the two countries that make up the Iberian Peninsula. Portugal and Spain both transitioned to democracy around the same time in the 1970s, and joined the European Union simultaneously in 1986. But while the larger nation has thrived economically and has become a major European player, Portugal has somewhat lagged behind.
From a foreign business perspective, this isn’t necessarily a bad thing: average wages in Portugal are approximately 30% lower than they are in Spain. It’s also a country that is open to foreign investment, and makes it quick and easy to get businesses up and running there. A fairly mixed economy, with 21% heavy industry, and a wide range of services (including tourism, particularly in Lisbon and the Algarve), also means there are opportunities in Portugal for many.
Over the last year or two, there have been some changes in Portugal from a payroll and employment perspective. These include minimum share capital requirements for private limited companies, how overtime is taxed, increases to the minimum wage, and increased employer tax breaks for raising salaries. These changes, and everything else you need to know, are covered in this guide to 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, having previously stood at €5,000. Public limited companies, however, retain a minimum start-up capital of €50,000 (approx. £42,500; $56,800).
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. £305; $410). 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. However, like its neighbor Spain, some businesses in Portugal still take a long siesta lunch break (or ‘sesta’ in Portuguese), although it isn’t as common as it once was. In these circumstances, working days tend to be two shifts of four hours each, with a break of two hours or more in between.
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 for companies with a headcount of less than 50, and 200 hours if agreed through collective bargaining. The first 100 hours of overtime worked are paid at 125% for the first hour on weekdays, and 137.5% for the second hour, and 150% for any time at weekends and public holidays. After 100 hours, these rates increase to 150%, 175% and 200% respectively.
There have recently been changes in how overtime work is taxed. For Portuguese tax residents, any overtime work is taxed at half their normal rate. For non-residents, the first 100 hours of overtime pay (increased from 50) is only taxed on amounts over and above the national minimum wage. After this, a rate of 25% applies.
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 one month afterwards, and then two months after two years’ service.
Compensation and Severance
The minimum wage in Portugal is regularly adjusted upwards, and has increased by more than 40% over the last ten years.
As of January 1st 2025, the minimum wage was €870 per month (approx. £740; $990). While this might sound very low by western European standards, it should be considered that employees in Portugal are entitled to 14 monthly salary payments each year: 12 regular ones, plus extras in June to cover their summer holidays and December in time for Christmas. This adds up to a total annual minimum wage of €12,180 (approx. £10,400; $13,800).
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; new legislation means that the first 70% of the total allowance for meal vouchers is now considered tax-free.
Severance pay is normally 18 days’ salary for each of the first three years’ service, and 12 days’ salary for each year beyond that. There are maximum caps in place of one year’s salary of that employee, or 240 times the monthly national minimum wage. 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 income tax rates in Portugal are relatively high. There are nine progressively increasing tax bands: the lowest of 13% applies to the first €8,059 (approx. £6,850; $9,150) of annual income; the highest of 48% applies to all earnings above €83,696 (approx. £71,200; $95,100).
An additional solidarity tax of between 2.5% and 5% applies to earnings between €80,000 per year (approx. £68,100; $90,900) and €250,000 per year (approx. £213,000; $284,400). 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.
Portugal’s corporate tax rate has been reduced from 21% to 20%, 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. £42,500; $56,800) of their annual taxable income: 16% in most areas, and 11.9% in Madeira and the Azores. VAT is 23% on the mainland, 22% on Madeira and 16% in the Azores.
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 2025, this is €4,350 (approx. £3,700; $4,940).
Holidays and Leave in Portugal
Employees in Portugal are entitled to 22 working days of paid leave each year. At least ten days of this entitlement should be taken in a single block (often as a summer holiday). New employees can accrue two days of leave each month through most of their first year of service. Unused leave can be carried over and used within the first four months 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. Each of Portugal’s local municipalities (there are over 300 of them) also have one public holiday each year, which should also be paid time off for employees that work there. Holidays that fall on weekends don’t usually generate an alternative day off on a weekday.
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).
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: entitlement is 28 days in total, with at least five taken consecutively within six weeks post-birth.
Beyond this, there is also a further paid parental leave entitlement available, that can be taken by one parent or the other. This is 78 days at 100% of salary, or 108 days at 80%.
Payroll in the Portugal: A summary
There’s plenty to get excited about when looking at Portugal for a foreign expansion. But as this guide demonstrates, there have been plenty of revisions to payroll and employment requirements in recent years that payroll teams will need to get their head around. Furthermore, additional changes in the future can’t be ruled out, so it’s recommended to look for external help (such as a global payroll partner with country-specific expertise) if you’re concerned about the workload involved in staying compliant.
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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