Employees to get 3.6% pay rise in State Budget 2026 – IRS tax down but total taxes up 4.5%

Portugal’s Finances minister Joaquim Miranda Sarmento pledged a 3.6% increase for employees when he unveiled the government’s outline State Budget for 2026 on Thursday.

And the minister pledged a minimum salary of €920 for 2026 as had been agreed with unions and company association bosses.

“I believe that the overwhelming majority of employees will have salary increases of over 3.6% and taxes will be cut this year”, said Sarmento in a press conference with journalists.

The reduction in IRS comes along with a number of measures taken for the State Budget 2025 which were passed in July by the Portuguese parliament to alleviate the tax burden.

Next year (2026) benefits will be on a lesser scale.

According to the outline budget “in 2026 it is forecast that the amount of IRS tax revenues will increase to €19.4Bn, which is up 5% on there estimate for 2025, meaning an extra €937 million.

“For 2026, the estimated growth in IRS revenues, despite marginal tax reductions, will mainly come about because of a favorable evolution in the jobs market – both in employment and salary per employee.”

On the tax benefits side, “State IRS tax expenditure will increase to €3.4Bn in 2026, a fall of 1.3% on 2025.

“It has been our practice to separate political decisions, which depend on the government, from budgetary matters. It is our hallmark and we already defended it when we were in opposition,” said Miranda Sarmento, in response to a question about the separation of fiscal measures.

“By presenting each law individually, this allows for much greater scrutiny of the government by parliament. It allows for a serious, in-depth and informed debate on each of the government’s measures. I repeat, it has been our hallmark to separate political measures from budgetary matters. Of course, the impact of the measures is in the law charts.”

Miranda Sarmento said that the eventual sale of TAP has been left out of the document because it could have an effect on the negotiations. “When it’s sold, the amount will have no impact on the budget balance”, he said.

The public debt is set to fall from 90.2% of GDP in 2025 to 87.8% in 2026 – “going further than the forecasts from the main institutions”. (CFP – 89.4%), BoP – 88.4%, CE – 89-7% and IMF – 87.9%).

And as for the various ministries, Miranda Sarmento said that each would get a reserve that they could use throughout the year.

“We have changed the budget paradigm. This will be the first State Budget in which all ministries have a set of programs, with objectives and goals. This will allow for better management of public spending and whether or not the proposed spending has been met. (…) It is a long-term structural change that will allow for greater accountability for spending in a few years,” explained Miranda Sarmento.

Giving a snapshot of the tax burden since 2023, the minister said that it fell from 35.2% that year and will fall to 34.7% next year.

The Minister of Finances estimates that the budget balance next year will be 0.1% or basically break-even and 0.3% for this year with public debt at 90% of GDP this year.

As for the total amount of tax cuts made by the government, this will stand at €1Bn for 2026 and €1.2Bn for 2025. (Down 17%)

The government also forecasts indirect tax revenues (VAT for example) will increase in 2026 by 5.1% to €38.450Bn and €36.5Bn for 2025.

Overall, direct and indirect taxes will go up 4.5% in 2026 to almost €68Bn with VAT bringing in €27Bn.

Portuguese Finance Minister Joaquim Miranda Sarmento attends a press conference on the proposal for the State Budget 2026 (OE2026) at the Hall of the Ministry of Finance in Lisbon, Portugal, 09 October 2025. EPA/JOSE SENA GOULAO
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