IRS: How Personal Income Tax works

The first months of the year always bring that familiar flutter of nerves: the IRS (Imposto sobre o Rendimento das Pessoas Singulares) tax return. For many, it is a confusing process, but here at Moloni ON, we like to make things simple. Let’s explain what Personal Income Tax is and how it affects your wallet.
IRS: How Personal Income Tax works
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Published on 26 March 2026Updated on 04 May 2026
2 min read

What is IRS?

IRS is the tax return you submit to the State to declare the income you earned between 1 January and 31 December of the previous year. For example: right now, in 2026, you are declaring what you earned in 2025. Simple, right?


What is it for and who does it apply to?

This tax applies to everyone residing in Portugal (on global income) and to non-residents who earn income here. The calculation is not the same for everyone; the State looks at your specific situation:

  • Your civil status;
  • How many dependents you have;
  • Your assets and any degree of disability (if applicable).

Which "drawer" does your income fall into?

IRS divides income into categories. Knowing yours is half the battle:

  • Category A: Employment income (your salary, bonuses, etc.).
  • Category B: Business and professional income (if you are self-employed or have your own business).
  • Category E: Capital income (interest and dividends).
  • Category F: Rental income.
  • Category G: Capital gains (such as selling a house).
  • Category H: Pensions.

Who is exempt from declaring?

Not all income is subject to tax. Outside the scope of IRS are:

  • Income below the minimum subsistence threshold (mínimo de existência - an amount updated annually);
  • Unemployment and family benefits;
  • Sick leave payments;
  • Meal allowances and travel expenses (within legal limits).

How is it calculated? (The part everyone wants to know)

IRS is a progressive tax: the more you earn, the higher the rate. The process boils down to this:

1. Gross Income: All your earnings are added together.

2. Taxable Income: Specific deductions are subtracted (such as Social Security contributions).

3. Family Quotient: If you are married and opt for joint taxation, your income is divided by 2 to determine the rate.

4. The "magic" formula: (Income x Tax Bracket Rate) - Amount to be abated.


Will I get a refund or have to pay?

The secret lies in the balance between your Tax Liability (the tax the State says you owe) and what you have already paid or spent:

  • Deductions: Health expenses, education, housing, and invoices with your NIF requested throughout the year. These lower the tax you have to pay.
  • Withholding Tax (Retenção na Fonte): That amount that is "taken" from your payslip every month. It is an advance payment to the State.

The verdict: If what you withheld (advanced) is greater than what you owe (after deductions), you receive a refund. If you withheld too little, you will have to pay the difference.

Note: This article is for informational purposes and does not replace the need to consult current legislation or seek support from specialised consultancy.