The 2026 State Budget Proposal includes a set of tax changes intended to ease the burden on families and businesses, promote investment, and align the tax system with current needs. This article focuses exclusively on tax and legislative measures, explaining the changes to IRS (personal income tax), IRC (corporate income tax), consumption taxes, and real estate taxation rules.
1. Changes to IRS (Imposto sobre o Rendimento das Pessoas Singulares – Personal Income Tax)
Adjustment of IRS brackets
One of the main measures in OE2026 is the reduction of IRS marginal rates—the draft legislation cuts 0.3 percentage points from the rates in the 2nd to 5th brackets. This reduction aims to provide tax relief to the middle class and households with intermediate incomes, increasing disposable income and encouraging domestic consumption.
Update of the minimum subsistence threshold
Another relevant legislative change is the update of the “mínimo de existência,” the income threshold below which no tax is due. The amount will be the greater of €12,880 or 1.5 × 14 × IAS (Social Support Index). In practice, this ensures that anyone earning the national minimum wage—€920 in 2026—is fully exempt from IRS.
This change is intended to protect lower-income workers and simplify tax calculation, similar to prior years.
Adjustment of withholding tables
The Minister of Finance has assured that the reduction in IRS rates will be reflected in the withholding tables as of January 2026. The measure is designed so that monthly withholding better matches the tax due, reducing the need for later adjustments and making it easier for taxpayers to manage finances throughout the year.
This legislative adjustment enhances system transparency and tends to reduce refunds or additional payments at settlement. Put simply, taxpayers will lend less money to the State over the year, and vice versa.
Maintenance of the exemption for productivity bonuses
OE2026 maintains the tax and social-security exemption for productivity bonuses of up to 6% of annual remuneration. This measure is meant to encourage companies to reward employee performance without tax penalties, stimulating productivity and competitiveness.
Although it is a renewal, the legal framework reinforces incentives for merit and remains an important component of labor-related tax policy.
2 . Reform of IRC (Imposto sobre o Rendimento das Pessoas Coletivas – Corporate Income Tax)
Gradual reduction of the IRC rate
For IRC, the 2026 budget sets a 1 percentage-point reduction in the headline rate, fixing it at 19%. Small and medium-sized enterprises (SMEs) will benefit from a reduced 15% rate on the first €50,000 of taxable income.
This strategy forms part of a progressive reduction target aiming to reach 17% by 2028, creating a more favorable environment for investment and business growth.
Review of taxation on the banking sector and extraordinary contributions
Following a finding of unconstitutionality, OE2026 repeals the Solidarity Contribution on the Banking Sector. The proposal states that taxation of the sector will be reviewed in 2026 to ensure tax fairness and competitiveness.
Additionally, the CESE (Extraordinary Contribution on the Energy Sector) for natural gas is also repealed, remaining in force only for other energy operators.
The CEIF (Special Contribution on the Pharmaceutical Industry) is maintained.
These legislative decisions show an intention to align financial-sector taxation with constitutional principles while preserving essential public revenue through new contributory models yet to be defined.
3. Consumption taxes
Fuels and ISP (Tax on Petroleum Products)
Although the ISP maintains its usual rates, OE2026 provides for the gradual elimination of the extraordinary discount applied in 2022 and 2023, as international energy prices decline.
ISP revenue is expected to increase by 4.6%, reflecting higher consumption and the reduction of rebates. The policy seeks to balance revenue needs with consumer protection, keeping fuel prices competitive relative to other EU countries.
IUC and ISV: revenues up, rates unchanged
The IUC (Single Road Tax) and ISV (Vehicle Tax) will not undergo changes to tables or brackets. However, projected revenues will rise. The increase results from fleet renewal and higher vehicle sales, as well as indexation of rates to inflation.
For taxpayers, leaving rates unchanged provides stability and predictability, although the impact on household budgets will depend on consumption patterns.
IABA, tobacco and nicotine
Under the IABA (Tax on Alcohol, Alcoholic and Non-Alcoholic Beverages), rates remain unchanged, but total estimated revenue rises to €317 million (+2.5%). The largest change is in tobacco tax, which is expected to generate €1.676 billion, a 4.4% increase. Also noteworthy is the introduction of a tax on nicotine pouches at a rate of 6.5 euro cents per gram, intended to bring these products in line with other tobacco derivatives, both for public-health reasons and tax fairness.
VAT and Stamp Duty maintained
The budget does not change VAT rates but forecasts a 5.1% increase in revenue, reaching €27.489 billion, reflecting an expanding economy and more efficient collection. Stamp Duty also keeps current rates, with projected revenue of €2.458 billion. As these do not change the legislation, the forecasts confirm the Government’s intention to stabilize the indirect tax burden, protecting consumption and domestic competitiveness.
4. Real estate taxation and housing
“IMT Jovem” and first-home incentive
“IMT Jovem” (Property Transfer Tax—youth/first-home regime) is updated to track market appreciation. The exemption for first-home purchases will apply to properties up to €330,500, and the 8% rate will apply to the next tranche up to €660,982.
This legislative measure aims to facilitate access to housing for young people and first-time buyer families, offsetting price increases and promoting residential mobility, while only partially keeping pace with the surge in housing prices.
Rent updates and IRS deductions
The Government authorizes residential rents to be updated by up to 2.24% in 2026, striking a balance between tenant protection and landlords’ right to keep pace with inflation.
In addition, OE2026 provides for a higher IRS deduction for moderate rents and reduces the IRS rate on that rental income from 25% to 10%. Through these measures, the executive intends to stimulate the supply of affordable rentals and reduce the tax burden for landlords who charge below-market prices.
The policy is complemented by eliminating capital gains tax on property sales where the proceeds are reinvested in affordable rental housing.
Tax benefits for moderately priced housing
To increase housing supply, the budget applies a reduced 6% VAT rate to the construction of price-controlled homes. This measure seeks to lower production costs and encourage developers and cooperatives to invest in affordable projects. Together with incentives under IRS, IMT, and IMI (Municipal Property Tax), this creates a favorable tax framework for affordable renting and the construction of moderately priced housing.
5. Other relevant tax measures
Environmental taxation and the energy transition
Although it does not imply immediate rate changes, OE2026 introduces instruments tied to environmental taxation, such as the Social Climate Plan and a strengthening of the Environmental Fund, which support decarbonization and energy-efficiency projects. The tax policy includes incentives for sustainable mobility and the circular economy, contributing to climate-neutrality targets. Some instruments may, in future, translate into tax benefits for those adopting green practices (such as VAT reductions on sustainable equipment or IRS deductions for investments in renewable energy), though these are not yet specified in the approved legislation.
Simplification and tax transparency
Finally, the Government commits to simplifying the tax system through program-based budgeting and removing non-budgetary provisions from the budget text. While this reform does not directly change rates or taxes, it clarifies the impact of each legislative measure and makes citizen oversight easier. Modernizing the budget process should reduce legal uncertainty and make tax administration more efficient, encouraging voluntary compliance.
A reflection
The tax measures in the 2026 State Budget proposal (OE2026) reveal a stated intention by the Government to reduce the tax burden on families and businesses, promote investment, and stabilize indirect taxation. The reductions in IRS and IRC rates, the update to the minimum subsistence threshold, and the incentives for affordable renting are presented as tools to bolster disposable income and stimulate economic activity.
However, in a context of persistent inflation and sharply rising housing prices, these measures may be insufficient to produce a real impact on Portuguese families’ lives.
In sum, although the budget seeks—through tax policy—to foster economic growth and strengthen competitiveness, its practical reach remains modest and somewhat misaligned with the economic reality of Portuguese households.
The success of these policies will depend less on legislative design and more on the Government’s ability to restore confidence and respond to social pressures with effective, structural measures.
The content of this information does not constitute any specific legal advice; the latter can only be given when faced with a specific case. Please contact us for any further clarification or information deemed necessary in what concerns the application of the law.